C$ link to oil seen broken until after U.S. election, rate move

Thu Oct 13, 2016 10:11am EDT
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By Fergal Smith

TORONTO Oct 13 (Reuters) - The Canadian dollar's normally tight link with the price of oil, which broke down in September, likely will not reassert itself until after the U.S. election and a potential interest rate hike by the Federal Reserve, currency strategists say.

Oil is a major Canadian export and the currency often tracks its price. But the Canadian dollar weakened to a six-month low of C$1.3315 against the U.S. dollar on Friday despite a deal by the Organization of the Petroleum Exporting Countries to limit output which lifted oil above $50 a barrel.

The currency was around C$1.2700 when oil climbed above $50 a barrel in early June.

"Other fundamentals have taken over. The interest rate differential is part of that and I think the Trump premium is part of that," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets.

Republican presidential candidate Donald Trump has said he would renegotiate or scrap the North American Free Trade Agreement if elected, posing a risk to the Canadian economy.

The weaker relationship between the Canadian dollar and oil will continue until after the U.S. election and until the Federal Reserve raises interest rates, said Jack Spitz, managing director of foreign exchange at National Bank Financial.

Markets have priced in about a 70 percent chance of a Fed hike in December, helping to push the U.S. dollar on Thursday to a seven-month high against a basket of major currencies.

The Bank of Canada is seen on hold until 2018.   Continued...