The Canadian dollar is expected to strengthen less than expected in the coming year if the Bank of Canada begins cutting interest rates ahead of the Federal Reserve and the U.S. election increases global trade uncertainty, poll suggests Reuters.
According to the median forecast of 40 foreign exchange analysts who participated in the survey from May 31 to June 4, the loonie will be little changed at 1.37 per US dollar, or 73.17 US cents, in three months, compared to 1.36 in last month’s survey.
It should then increase by 2.5% to settle at 1.33 in one year, against 1.32 previously forecast.
Canada’s central bank will cut interest rates to 4.75% later on Wednesday, according to three-quarters of economists surveyed in a separate Reuters poll, which predicted three more cuts this year.
Money markets expect 65 basis points of easing from the Bank of Canada this year, compared to 45 basis points from the Fed.
“You’re just too far away from Fed cuts at this point, when the Bank of Canada is more imminent,” said Benjamin Reitzes, Canadian rates and macroeconomics strategist at BMO Capital Markets.
“While some of this rate differential is priced, it is likely to go a little further, which will not be positive for the Canadian dollar in the short term.
According to a recent analyst poll, the Canadian central bank would be willing to cut interest rates three times before the Fed’s first decision, before a decline in the currency threatens the inflation outlook.
The U.S. election in November could be another headwind for the Canadian dollar if it leads to higher tariffs that dampen the outlook for global trade, analysts say.
Canada is a major producer of raw materials and sends approximately 75% of its exports to the United States.
“This is all the more reason to be cautious in your outlook,” Mr. Reitzes said.
(For other articles from the June Reuters foreign exchange poll:)
