The Canadian dollar could decline in the months ahead as the market underestimates the divergence which may take place between Bank of Canada and the U.S. Federal Reserve’s monetary policy, one strategist says. 
 
The loonie is sensitive to a large monetary policy difference between Canada and the U.S., and while market participants believe the bank will cut rates largely at the same time and speed as the Fed, Karl Schamotta, chief market strategist at Corpay, says he doesn’t think this will be the case. 
 
“What we do think is that those rate expectations are going to come back down more profoundly, interest rate differentials will tilt more decisively against the Canadian dollar, and that should drag us down a couple more cents than where we are today,” he told BNN Bloomberg in an interview on Wednesday. 
 
Schamotta said the Canadian dollar could fall below US$0.70 due to this divergence and added the economic backdrop in Canada and the U.S. is already putting pressure on the Canadian dollar. 
 
“There’s been a profound divergence in economic data coming between the U.S. and Canada,” he said. 
 
Schamotta pointed to the resilience in the U.S. economy through the latest round of economic data, which points to third-quarter growth as consumer spending and business investment remain strong, whereas Canada’s economic data reflects a standstill in gross domestic product. 
 
The private sector in Canada is also showing balance sheet weakness compared to the U.S., he added. 
 
“The private sector in the U.S. is carrying vastly lower debt levels than the Canadian private sector, that means that when we see global borrowing costs rise, as they have for the last couple of months, we know that the pain is going to impact Canada in a more profound way,” he cautioned. 
 
Lastly, he pointed to the risk of the country’s residential sector as Canadians will be forced to pay more for mortgages or refinancing in the next several years due to the high-rate environment. 
 
“If you’re a currency trader and you’re looking at the long-term picture for the Canadian economy, you have to assume that consumption and business investment is going to remain relatively low for not just a year or two, but potentially five or more years into the future,” he said. 

Adam Button, chief currency analyst at Forexlive, agrees with Schamotta's outlook.
 
He is predicting a US$0.69 cent Canadian dollar in the New Year should Canadian monetary policy diverge from the U.S.
 
"The year ahead will be extremely tough for the Bank of Canada,” he wrote in an email to BNN Bloomberg. “The Governor Tiff Macklem will continue to face criticism for the infamous pledge to keep rates very low for a very long time as mortgages reset and the spring real estate market disappoints.”
 
At some point in 2024, Button believes the bank will face the difficult question of whether to allow Canadian monetary policy to diverge from the U.S. 
 
"Cutting more aggressively than the Fed risks re-igniting inflation via the currency but that’s the path they will be forced to take," he said.