Loonie Gains at Risk as Eyes Turn from Nafta to the Bank of Canada

(Bloomberg) -- The next few weeks are looking bad for the CAD, even as Canada looks like it’s about to rejoin Nafta talks, according to Toronto-Dominion Bank.

The Canadian dollar gained about 0.4 percent after the U.S. and Mexico reached a bilateral deal to revamp the North American Free Trade Agreement, boosting prospects that Canada will come off the sidelines. Canadian Foreign Minister Chrystia Freeland is heading to Washington for talks Tuesday, according to a spokesman.

But in the view of TD, the loonie’s gains will probably fizzle as traders shift their focus back to comments over the weekend by Bank of Canada Governor Stephen Poloz downplaying the prospect of aggressive rate increases. He spoke in Wyoming at a symposium of central bankers.

The loonie could “start fading later in the week,” because positive developments in Nafta talks and a potential October rate hike are already priced in, said Mark McCormick, TD’s North American head of FX strategy. “Poloz’s speech at Jackson Hole poured some cold water on the notion the bank may shift this tightening cycle into overdrive,” he wrote separately in a note.

2018 Struggle

The Canadian currency has weakened about 3.1 percent this year versus the greenback as tensions escalated between the U.S. and some of its biggest trading partners. Last month, hedge funds and speculators amassed the biggest net short position in the loonie in more than a year. Those bearish bets have since been trimmed.

TD recommends buying the U.S. dollar against its Canadian counterpart when the pair dips toward C$1.2950. The loonie was at C$1.2971 per U.S. dollar as of about 2:15 p.m. in New York. It’s also trading near the C$1.29 year-end median forecast of analysts surveyed by Bloomberg.

Greg Anderson, head of FX strategy at Bank of Montreal, sees stability ahead for the Canadian currency despite the shifting interest-rate outlook and trade developments.

“I don’t think we’re going too far from C$1.30,” Anderson said. Poloz isn’t going to want to tighten at a more aggressive pace than the Federal Reserve, “because he doesn’t want the Canadian dollar to run away.”

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