It is then expected to recover to C$1.2500 by the end of the year. The currency has been boosted in recent weeks by a 2 1/2-year high for the price of oil, one of Canada's major exports, and firm domestic data which raised expectations for a Bank of Canada interest rate increase as soon as January 17. But analysts say the central bank is likely to wait for some uncertainties to clear before raising rates.
"The Fed looks to be more aggressive earlier in the year as compared to the Bank of Canada," said Mark Chandler, head of Canadian fixed-income and currency strategy at RBC Capital Markets. "We don't think the bank will follow through this month. We think that they'll wait and see what the outcome is of some of the trade talks."
The central bank raised rates for the first time in seven years in July and then again in September. Its benchmark interest rate sits at 1 percent, while the Fed's is in a range of 1.25 percent to 1.50 percent. US President Donald Trump has threatened to withdraw from the North American Free Trade Agreement with Canada and Mexico if he cannot rework it in favor of the United States. Officials from the three countries will meet in Montreal January 23-28 for talks on thorny subjects such as autos, dispute settlement and an expiry clause.
The outcome is important to Canada, which sends about 75 percent of its exports to the United States. The Canadian dollar would need to depreciate by about five percent to offset the increase in tariff levels that a dissolution of NAFTA could trigger, said Nick Exarhos, economist at CIBC Capital Markets.
He had one of the most bearish three-month calls for the loonie at C$1.3300. The uncertain impact of tighter mortgage rules, which took effect at the start of January, on a once red-hot housing market, and past rate hikes on highly indebted consumers could also delay tightening.