TORONTO Oct 13 The Canadian dollar's normally
tight link with the price of oil, which broke down in September,
likely will not reassert itself until after the U.S. election
and a potential interest rate hike by the Federal Reserve,
currency strategists say.
Oil is a major Canadian export and the currency often
tracks its price. But the Canadian dollar weakened to a
six-month low of C$1.3315 against the U.S. dollar on Friday
despite a deal by the Organization of the Petroleum Exporting
Countries to limit output which lifted oil above $50 a barrel.
The currency was around C$1.2700 when oil climbed above $50
a barrel in early June.
"Other fundamentals have taken over. The interest rate
differential is part of that and I think the Trump premium is
part of that," said Greg Anderson, global head of foreign
exchange strategy at BMO Capital Markets.
Republican presidential candidate Donald Trump has said he
would renegotiate or scrap the North American Free Trade
Agreement if elected, posing a risk to the Canadian economy.
The weaker relationship between the Canadian dollar and oil
will continue until after the U.S. election and until the
Federal Reserve raises interest rates, said Jack Spitz, managing
director of foreign exchange at National Bank Financial.
Markets have priced in about a 70 percent chance of a Fed
hike in December, helping to push the U.S. dollar on
Thursday to a seven-month high against a basket of major
The Bank of Canada is seen on hold until 2018.
The three-month rolling correlation between the Canadian
dollar and oil reached 0.8 in early September, according to
Reuters data, indicating that the currency and the commodity
move mostly in the same direction. It plunged to less than 0.1
RBC Capital Markets expects firmer oil prices heading into
2017, but sees the Canadian dollar weakening to C$1.3400 by the
end of the first quarter, said Mark Chandler, head of Canadian
fixed income and currency strategy at the investment bank.
To be sure, the strong positive correlation between oil and
the Canadian dollar has broken down before. It briefly turned
negative after a wildfire in Alberta in May boosted oil prices
but hurt Canada's growth outlook.
Oil is unlikely to reassert as the dominant driver until
after a Bank of Canada interest rate decision in January, said
BMO's Anderson, who thinks the central bank's more dovish tone
has played a part in the weaker correlation.
(Editing by Bill Trott)