By Fergal Smith
TORONTO (Reuters) – The Canadian dollar is set to strengthen over the coming year if the Federal Reserve shifts to cutting interest rates as expected and the U.S. economy slows without slipping into recession, a Reuters poll found.
In the March 1-6 poll of 40 foreign exchange analysts the median forecast was for the to strengthen 1.4% to 1.34 per U.S. dollar, or 74.63 U.S. cents, in three months, matching the forecast in February’s poll.
It was then predicted to advance to 1.30 in a year, also matching the previous month’s forecast. The expected strengthening comes as some analysts forecast broad-based declines for the U.S. dollar.
“The gradual decline in USD-CAD certainly in part reflects a slowing U.S. economy and the Fed embarking on a rate cutting cycle,” said Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.
“We also assume no hard landing (for the economy) and if risk remains broadly favourable this year that should also benefit CAD.”
Canada is a major exporter of commodities, including oil, so the loonie tends to be sensitive to swings in investor sentiment.
Still, roughly 75% of Canada’s exports go to the United States so slower U.S. growth may not be a recipe for Canadian dollar strength against Group of Ten currencies other than the greenback, say analysts.
“A slowing economy in the U.S. and a weakening U.S. dollar tends to result in CAD underperformance vs other G10 currencies,” Halpenny said.
The Bank of Canada is also expected to begin a rate cutting campaign this year as the economy slows and inflation cools.
Analysts expect the Canadian central bank to leave its benchmark interest rate on hold at a 22-year high of 5% on Wednesday and at the following policy decision in April but to then start cutting in June, a recent Reuters poll showed.
(For other stories from the March Reuters foreign exchange poll:)
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