Economists at Scotiabank note a number of other challenges are perhaps developing for the Canadian dollar. Therefore, the loonie is set to keep a defensive tone.

CAD faces headwinds on a number of fronts

“CAD-positive yield differentials earlier this year have evaporated at the short end of the curve and now stand healthily in the USD’s favour. That may not last but it is a clear impediment for the CAD right now.”

“Commodity prices have been softening since mid-year as global growth expectations weaken. The CAD has decoupled from oil prices this year but broadly lower commodity prices and weaker terms of trade are clearly less supportive for the CAD.”

“While we think equity market trends are driving the bus in terms of the CAD trend in the short run, our correlation screens do note a strengthening in the CAD’s relationship between spreads and commodities at the moment. These factors may become more influential on the CAD’s performance if the equity market link weakens.”