The recent moves in the loonie have been driven primarily by broad-based U.S. dollar weakness rather than Canada-specific developments, Commerzbank said in a note Thursday.
Last week's jobs data suggest that a reversal in the Canadian dollar's strengthening trend is unlikely to be driven by domestic factors, a view further supported by Wednesday's Bank of Canada decision to keep its benchmark lending rate unchanged, Commerzbank FX Analyst Michael Pfister said in the note.
The Canadian currency traded at C$1.4031 early Thursday, off its late June levels of C$1.4232, which was the weakest for the loonie in more than a year.
Markets had already largely discounted the possibility of near-term tightening, with year-end rate-increase expectations falling to just below 20 basis points before the decision, down from more than 50 basis points in March and April, the bank said.
"We continue to assume that an interest rate hike will only occur if there is a sustained improvement in real economic data by December," Pfister said. "But it is likely to take some time for this improvement to materialize."
Further declines in the greenback against the loonie in the coming weeks are likely to be driven primarily by continued weakness in the U.S. dollar, according to Commerzbank.