FxWirePro: Crude, macros boost up loonies’ medium term gains but US dollar gains to spare aside at end-Q4

After a brief pause through mid-September due to the current crude price recovery, the uptrend in USD/CAD resumed as the pair moved to a new cyclical high at 1.3457 - the highest level since June 2004. We project the catalysts for USD/CAD strength to remain in place through year-end, leading to a Q4 peak at 1.3600.

First, weakness in crude oil prices which has been the primary factor driving USD/CAD higher this year - is expected to persist. The current WTI market price of USD 49.37 is well below the assumption of USD 60 that was contained in the Bank of Canada's July Monetary Policy Report. With our energy analysts not expecting average annual WTI prices to return above USD 60 until next year, USD/CAD should remain supported by this dynamic.

Second, although recent improvement in the Canadian economic data monitoring an annualized increase of 2.5% for Q3 2015 GDP versus the BoC's forecasts of 1.5%, we do not expect the BoC to raise interest rates until Q3 2016 amidst evidence of a more sustained recovery in commodity prices and growth metrics.  On the USD side, Fed's rate speculation cannot be disregarded even though manipulative rate hike expectation by the many analysts think that would be deferred for Q1'16. Any which ways, during this season dollar strength is quite certain.

Despite the weak September US payroll report, the Fed is expected to hike rates before the BoC (we are currently calling for a 25 bps hike in December). This dynamic should cause further widening in the 2-year US-CA rate spread and serve as another bullish factor underpinning USD/CAD into year-end.