As rate hike bets propelled the Canadian dollar to as high as 1.216 per U.S. dollar in September, it has weakened steadily against the USD and currently trading at 1.287 per dollar. Even after more than 700 pips decline against the USD since September, we believe that further decline could be on the cards. After two rate hikes this year, the Bank of Canada (BoC) has signaled a pause and that has led to the weakness in the Loonie.
While hike pause has led to the initial weakness in the Loonie, it is hardly the factor that has propelled 700 pips decline. The current trade dispute between the United States and Canada with regard to Lumber and NAFTA (North American Free Trade Agreement) has clearly been weighing on the Loonie. In addition to that, Canada’s heavy crude has been broadly left out of the recent rally in oil prices. Very large discount in Canada’s West Canada Select (WCS) has also been weighing on the Loonie. As of today, while Brent benchmark is trading at $63 per barrel, WCS is trading at $23 discount to Brent. The recent news (spill from Keystone pipeline leading to closure) has also not been positive for the Loonie.
We are expecting the Loonie to further decline to test the supporting line around $1.32 area, as shown in the chart above.