The Canadian dollar is set to strengthen less than previously expected over the next year if the Bank of Canada starts cutting interest rates before the Federal Reserve and the US election increases global trade uncertainty, a survey says Reuters.
According to the median forecast of 40 foreign exchange analysts in the May 31-June 4 survey, the loonie will be little changed at 1.37 per U.S. dollar, or 73.17 U.S. cents, in three months, compared with 1.36 in survey last month.
It was then forecast to advance 2.5% to 1.33 in one year, compared to 1.32 previously forecast.
Canada’s central bank will cut interest rates to 4.75% later on Wednesday, according to three-quarters of economists in a separate Reuters poll that pointed to three more cuts this year.
Money markets expect 65 basis points of easing from the BoC this year, compared to 45 basis points from the Fed.
“At this point, Fed cuts are too far away, while Bank of Canada cuts are more imminent,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.
“While some of this rate differential is priced in, it is likely to go a little further, which will not be good for the Canadian dollar in the short term.”
Canada’s central bank would be willing to cut interest rates three times before the Fed’s first move, before a declining currency threatens to jeopardize the inflation outlook, according to a recent survey of analysts.
November’s U.S. election could pose a further headwind for the Canadian dollar if it leads to increased tariffs that dampen the outlook for global trade, analysts say.
Canada is a major producer of raw materials and sends about 75% of its exports to the United States.
“It’s all the more reason to be cautious about the outlook,” Reitzes said.
(For more stories from the Reuters June foreign exchange poll:)
