New highs ahead for CAD in Q4

Weakness in crude oil prices, which has been the primary factor driving USD/CAD higher this year, is expected to persist. Of note, the current WTI market price of is well below the assumption of USD60 that was contained in the Bank of Canada's July Monetary Policy Report. 

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

"With average annual WTI prices unlikely to return above USD60 until next year, USD/CAD should remain supported by this dynamic. Second, although recent improvement in the Canadian economic data has RBC Economics monitoring an annualized increase of 2.5% for Q3 2015 GDP versus the BoC's forecast of 1.5%, the BoC is not expected to raise interest rates until Q3 2016 amidst evidence of a more sustained recovery in commodity prices and growth metrics", says RBC capital markets. 

The Federal Election will be taking place on October 19 and will garner more market attention as it approaches. The latest Ipsos Reid poll raises the possibility of a minority government, with the Liberals at 33%, the Conservatives at 32% and the NDP at 27% (+/-3.0%). 

"Despite the weak September US payroll report, the Fed is expected to hike rates before the BoC. 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", forecasts RBC.

However CAD performance around elections dating back to the 1970s shows that CAD has not reacted in a clear, conclusive way to the outcomes. Therefore the election is not expected to have a pronounced impact on the currency and view it as a neutral factor.