Loonie Drops as Short-Covering Support Fades
The Canadian dollar recently saw a notable decline, weakening against its U.S. counterpart as the support from short-covering faded. Investors are betting on a continued easing of interest rates by the Bank of Canada (BoC), aiming to stimulate the local economy. The currency, commonly referred to as the “loonie,” was trading 0.1% lower at 1.3590 per U.S. dollar, which equals 73.58 U.S. cents. This followed a range between 1.3566 and 1.3604, with the loonie touching its lowest level since August 21 on Wednesday.
Canadian Dollar Set to Underperform
According to Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, the Canadian dollar is expected to underperform against the U.S. dollar in the coming months. He suggests that this trend might persist due to the Bank of Canada continuing its easing policies. This weaker performance is aligned with recent data showing that speculators have reduced their bearish positions on the Canadian dollar, reaching the lowest level since April, based on the U.S. Commodity Futures Trading Commission data.
Weaker Economic Growth and Oil Prices Pressure the Loonie
A lower short position may reduce speculators’ vulnerability to sudden rallies in the currency. As Reitzes explains, the positioning is more balanced, yet the Canadian economy remains notably weaker than the U.S. economy. Economists predict that growth in Canada’s third-quarter economy will likely fall short of the Bank of Canada’s projections. Additionally, the recent decline in oil prices, one of Canada’s major exports, has put further pressure on the loonie. Although U.S. crude futures rallied by 2.5% on Thursday, settling at $68.97 per barrel, analysts believe the loonie’s underperformance may persist.
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