08:55 AM EST, 11/04/2024 (MT Newswires) -- In October the Canadian dollar (CAD or loonie) weakened notably against the US dollar (USD) in terms of London closing rates with USD/CAD rising from 1.3510 to 1.3933, noted MUFG.

The Bank of Canada at its meeting in October cut the key policy rate by 50bps to 3.75%, the fourth cut in consecutive meetings totaling 125bps.

The Canadian dollar weakened notably in October, reflecting the broad-based strengthening of the US dollar as investors position for a Donald Trump presidential election victory on Tuesday, said the bank. However, CAD depreciation versus the US dollar was much less than nearly all other G10 currencies with only the Swiss franc outperforming.

CAD may be benefitting from an expectation that Canada could be largely protected from tariff increases given the USMCA deal that was signed under Trump's first term in office, pointed out the bank. Trump's focus appears to be much more on Mexico than Canada and with the

USMCA deal up for renewal in July 2026 there is time for discussions to take place without aggressive near-term action.

In addition, a Trump victory that lifts US equity markets and strengthens the economy would have benefits for Canada given the close links, added MUFG. Speculation on a Trump victory and the decision of the BoC to cut by 50bps in October with the potential for further bigger cuts has seen the two-year US-Canada swap spread surge to new highs -- 95bps -- and is certainly indicative of risks of a break above the key 1.4000 level.

The spread is now at the widest in the history of Bloomberg swap data back to 2007, according to the bank. There have been two previous occasions when USD/CAD has broken the 1.4000 level -- 2016 & 2020 -- and a Trump election victory

will likely mark a third occasion.

MUFG expects a break higher to potentially close to the 2016 high -- around 1.4500 -- but would assume a retracement back relatively quickly.