The Canadian dollar strengthened alongside crude prices into mid-January but has since eased off, as the Bank of Canada decided to forgo a January rate hike. According to economists at CIBC Capital Markets, loonie is set to depreciate ahead as the USD strengthens and markets move to price matching rate hike cycles across the Canada-US border.

Substantial relief on crude oil prices is needed to break 1.30

“A March 25bps hike by the Fed is more than priced in, and won't move the needle materially on CAD. But as we move further into the year, we look for the market to add room for more Fed tightening post-2023. That should support a broad strengthening in the USD, and the loonie will follow the pack in weakening, compounded by a paring of BoC rate hike expectations as the year progresses.” 

“To break 1.30 on CAD, we'll need substantial relief on crude oil prices. That could come if Russia-Ukraine tensions ease, the US reaches a nuclear deal with Iran, US shale output continues to ramp up, or OPEC+ countries redistribute some quota room to countries that have the capacity to deliver more oil.”