Canadian dollar falls on widening rate differentials as fourth-quarter headwinds loom for loonie, analyst says

The Canadian dollar is down 1.7 per cent this month and fell below 71 cents U.S. in early trading on Wednesday. Photo by Brent Lewin/Bloomberg files

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The Canadian dollar is down 1.7 per cent this month and fell below 71 cents U.S. in early trading on Wednesday for the first time since July as rising bets for more stateside interest rate hikes put pressure on the loonie.

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“The loonie’s weakness … is largely a function of the (United States) dollar’s strength,” Karl Schamotta, chief market strategist at Corpay Inc., said in a note on Wednesday.

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The U.S. dollar has been on a tear over the past five days, rising against a basket of other major currencies as investors hike their bets that the U.S. Federal Reserve will increase interest rates again at its Oct. 28 meeting after lifting them 25 basis points last week.

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The Fed’s funds rate now sits at 3.75 per cent to four per cent versus the Bank of Canada overnight lending rate of 2.25 per cent, which has held steady for the past seven consecutive meetings.

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“Rate differentials have tilted further against all of the dollar’s major rivals, contributing to losses in spot markets,” Schamotta said.

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The world’s 10 major currencies, including the euro, yen and pound, are down 0.19 per cent to nearly one per cent for the Australian dollar over the past five days.

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More broadly, U.S. tariffs pose a hurdle for the Canadian currency, Schamotta said.

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“Markets, we think, are bracing for some softness in the economy in the coming months,” he said, as consumers and businesses pull back on spending.

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Ottawa’s tax reforms in the form of the productivity mega deduction that were introduced last week, and its efforts to attract global investors and increase sales to the European Union could pay off eventually, Schamotta said, “but the effects will be incremental and slow to arrive.”

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Shaun Osborne, chief currency strategist at the Bank of Nova Scotia, said the Canadian dollar was the “best of the rest” of the G10 from yesterday to today.

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He said the “biggest drag” on the loonie is the wide spread on interest rates between Canada and the U.S.

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But Osborne said the fourth quarter also typically presents stronger headwinds for the Canadian dollar, which could start showing up in the coming weeks.

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He said investors should look for negative returns for the loonie versus the U.S. dollar in October and November, and there may be some softness against the euro and the pound.

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The Australian dollar is nearing par with its Canadian counterpart for the first time in nine years, with Osborne predicting it to solidify those gains due to expectations of a strong jobs report later today in that country.

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