The

Canadian dollar

“has its work cut out” for it to come back from the decline in

value against the greenback

that started in June.

“The (

United States dollar’s

) overall resilience and bullish longer-term trend dynamics suggest the (Canadian dollar) still has its work cut out if it is to improve significantly in the near term,” Shaun Osborne, chief FX strategist at Scotiabank Global FX Strategy, said in a note on Monday.

The Canadian dollar began its slide in June, falling 3.3 per cent against its American counterpart to 71.3 U.S. cents, its lowest level since April.

The decline comes after a rally earlier in the year, when it rose a bit more than seven per cent to 73.7 U.S. cents from a multi-decade low of 68.8 U.S. cents.

It appeared the Canadian dollar was potentially set to continue climbing as

investors looked askance

at the U.S. dollar, which had suffered a sharp sell-off against a basket of

developed economy currencies

, including the loonie.

Analysts called the U.S. dollar selloff the “de-dollarization trade” and attributed it to jumpy investors looking to hedge their risk over concerns about the effect of tariffs on the U.S. economy and a swelling federal deficit, moving funds into other reserve currencies such as the Japanese yen, Swiss franc and the euro.

Some investors now think the scope of the de-dollarization trade was overblown, as money flows back into the U.S. dollar.

Aroop Chatterjee, managing director and macro strategist at Wells Fargo & Co., said the de-dollarization trend was “overstated” as central bank holdings of U.S. dollars appear stable.

He said the U.S. dollar has strengthened in the face of weakening global economic data and shifting trade tensions between the U.S. and China.

“In a world of elevated policy uncertainty, long-term investors may be more tolerant of U.S. policy risks, given the USD’s unmatched liquidity and depth of capital markets,” he said in a note. “While this dynamic could shift if U.S. policy risks intensify, we see limited near-term justification for meaningful de-dollarization.”

On the Canadian dollar side, Osborne said a few technical moves need to happen “to suggest that a recovery is developing.”

For example, the Canadian dollar needs to “regain” its 200-day moving average of 71.6 U.S. cents, coupled with a drop by the U.S. dollar through the $1.39 level (Canadian) — its September high and 40-day moving average — “to indicate stronger chances of a more sustained CAD rebound.”

However, that could be a tall order given the upcoming

Bank of Canada

interest rate announcement on Oct. 29.

Currently, markets are betting the central bank will cut its policy rate by 25 basis points again following its previous cut in September, which will bring the rate down to 2.25 per cent.

“We think swap-implied odds on a cut — currently near 70 per cent — could climb slightly, putting downward pressure on the loonie,” Karl Schamotta, chief market strategist at Corpay Research, said in a note.

The U.S. Federal Reserve will also announce a rate decision on the same day as the Bank of Canada, with markets putting the odds of a cut at nearly 100 per cent. That would leave the Fed’s effective rate at four per cent — still well above rates in Canada, continuing to make the U.S. dollar a more attractive option for investors.

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