Canada’s dollar will strengthen over the coming year as soaring commodity prices boost the domestic economic outlook and the Bank of Canada hikes interest further, but gains for the loonie will be less than previously thought, a Reuters poll showed.
The median forecast in the Reuters poll was for the Canadian dollar to gain around 1.6 per cent to 1.25 per U.S. dollar, or 80 U.S. cents, in three months’ time, compared to 1.2450 in last month’s forecast. It was then expected to climb to 1.23 in a year’s time.
“High commodities, Bank of Canada tightening should give the CAD an edge as we move through the balance of the year,” said Shaun Osborne, chief currency strategist at Scotiabank.
“Even if we see commodity prices drop back from current levels in the longer run, there is still an unrealized terms of trade boost here for the CAD that should get factored in in the next few months.”
Terms of trade is the ratio of export prices to import prices. An improvement makes a country wealthier.
Canada is a major producer of commodities, including oil, which has surged to its highest level since September 2008 on concerns sanctions on Russia after it invaded Ukraine will lead to further tightening of global energy supplies.
“A higher than previously expected base oil price and our expectation of an improvement in the global growth outlook has led us to revise down our USD-CAD forecast,” said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.
Explaining crude oil’s return to $100 per barrel
Interest rate hikes should also help the loonie, providing “a solid backstop” during periods of safe-haven demand, Harvey added.
Geopolitical uncertainty has weighed on currencies such as the Canadian dollar that are sensitive to risk appetite but it did not stop the Bank of Canada from raising its key interest rate on Wednesday for the first time since October 2018.
The central bank has pledged to tame inflation, which climbed in January to a 30-year high of 5.1 per cent.
Data has also showed Canada’s economy grew 6.7 per cent in the fourth quarter on an annualized basis and likely grew further in January despite restrictions to contain the spread of the Omicron coronavirus variant.
Money markets expect five additional rate hikes by the end of the year, which would raise the policy rate to the 1.75 per cent level it stood at before the pandemic.
With the tightening cycle up and running, the BoC could next move to shrink its bloated balance sheet. Analysts say quantitative tightening could be announced as soon as the next policy decision on April 13.
(Reporting by Fergal Smith; Polling by Prerana Bhat and Vijayalakshmi Srinivasan; Editing by Alison Williams)
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