TORONTO (Reuters) – Analysts are sticking to their forecasts for a stronger Canadian dollar over the coming year, expecting an improved global economy and less central bank uncertainty that would boost the commodity-linked currency, a Reuters poll showed on Friday.
The loonie has weakened about 8% since March 2022 as aggressive interest rate hikes by the Federal Reserve and other major central banks to tackle inflation cooled prospects for the global economy this year. But analysts say the economic outlook could get better.
According to the median forecast of more than 30 currency analysts in the March poll, the Canadian dollar will strengthen 1.5% to 1.34 per U.S. dollar, or 72.63 U.S. cents, in three months’ time, matching last month’s forecast.
It was then expected to rally to 1.30 in a year, which is a gain of 4.6% and also in line with February’s forecast.
“A supportive growth backdrop boosted by China’s reopening, a stronger European economy, and diminished central bank policy uncertainty will be the catalyst for a capital exodus from the U.S. dollar, which will likely take the loonie along for the ride,” analysts at Monex Europe, including Simon Harvey, said in a note.
The reopening of China’s economy could fuel demand for commodities produced in abundance by Canada, including oil. Manufacturing activity in China grew last month at the fastest pace in more than a decade, data showed on Wednesday.
Still, there are headwinds that could delay the loonie’s recovery. Canada’s economy is likely to be particularly sensitive to higher borrowing costs after households borrowed heavily in recent years to fuel a red-hot housing market.
That point was not lost on the Bank of Canada. It has signaled a pause in its interest rate hiking campaign to assess the impact of its tightening on the economy.
Data on Tuesday showed Canada’s economy stalled in the final three months of 2022 but likely rebounded in January.
Money markets expect the BoC to keep its benchmark rate on hold at 4.50% at a policy decision next Wednesday.
“Over the next few months, we think the Canadian economy is likely to be more susceptible to the impacts of higher interest rates than the U.S. economy,” said Royce Mendes, managing director and head of macro strategy at Desjardins, expecting the rebound in the Canadian dollar to take until next year to arrive.
“If we’re able to get inflation under control, if the global economy and the domestic economy have already bottomed out then 2024 should provide a solid backdrop for the Canadian dollar,” Mendes said.
(For other stories from the March Reuters foreign exchange poll:)
Source: Economy - investing.com
