Canadian dollar likely to drop further next year

After strengthening to US$0.82 in early September, interest rate differentials have pushed the Canadian dollar back down to US$0.79. We expect a further widening in rate differentials next year, with US rates rising while Canadian rates fall back, to put much more downward pressure on the Canadian dollar. Although slightly high oil prices should provide some support to the loonie, we expect a housing market correction to weigh heavily on economic growth next year, prompting the Bank of Canada to reverse course and lower interest rates. After starting next year at close to US$0.80, we expect the Canadian dollar to fall to US$0.75 by end-2018. Moreover, if US President Donald Trump opts to unilaterally withdraw the US from NAFTA, the Canadian dollar might fall much lower.