Canadian dollar falls from 4-month high after Trump boosts U.S. dollar

The Canadian dollar retreated from a four-month high against the U.S. dollar on Thursday after comments from U.S. President Donald Trump boosted the greenback against most major currencies.

During his first visit to the World Economic Forum in Davos, Switzerland, Trump stressed that he ultimately wanted to see a stronger U.S. dollar.

The move comes on the back of comments made by Treasury Secretary Steven Mnuchin on Wednesday, when he said a weaker buck was good for American exporters.Those comments had sent the U.S. dollar to a three-year low against a basket of currencies.

On Thursday, the loonie ended up closing at a trading average of 81.15 US cents after trading at its highest level since September in the morning.

The Canadian dollar has risen some five per cent against the greenback over the past month, which is considered a big move on currency markets.

But some strategists are quick to point out that the loonie could hit some bumps.

"From our perspective, this move is looking a bit stretched, when we look at some of the fundamentals that have been driving the Canadian dollar for probably a year now," said Eric Theoret, a strategist at Scotiabank.

He thinks the financial markets are pricing in more interest rate hikes from the Bank of Canada this year than what actually might take place.

The central bank is expected to raise rates at least two more times this year after its first hike to the benchmark interest rate just last week.

U.S. dollar story

While the rise in the Canadian currency has been impressive, analysts also stressed that much is dependent on the direction of the U.S. dollar.

David Doyle, analyst at Macquarie Capital Markets, said the loonie's rise is not a story about the strength in the currency as much as it is about weakness in the U.S. dollar against almost every global currency.

"In Canada, we focus on the loonie, but it's been almost every currency globally that's been rising relative to the U.S. dollar," he said.

Oil 'not relevant'

Bipan Rai, strategist at CIBC Capital Markets, echoed Doyle's view.

"While oil prices are helping, it's the cyclical decline in the U.S. dollar combined with decent domestic numbers that are bolstering the loonie for now," he said. 

"Unless oil prices reach a level that drive fresh investment in the oil sands sector, the loonie's rise will be mostly reflective of the U.S. dollar's cyclical downtrend."

He expects the Canadian dollar to continue trading within a range of 80 to 83 US cents in the coming month. 

Theoret backed that sentiment, saying the price of oil is no longer as relevant to the movement of the Canadian dollar.

"That relevance was very important and very high in 2014 when we had the oil price crash and Canada's adjustment to that. 

"That was a period where oil prices were the driver for the Canadian dollar, but when we look at currencies generally, fundamentally, the core piece we look at is interest rates."

Analysts agreed that NAFTA talks are also a bigger risk when it comes to the strength of the Canadian dollar.

"What we've seen in financial markets over the last number of months is that when you've had negative headlines come out in regards to NAFTA, it's triggered Canadian dollar weakness," said Doyle.

Rai added that any decline in global demand that would impact Canadian exports would also lower the value of the loonie.