The Canadian dollar is expected to lose ground against its U.S. counterpart in the coming months, though economists forecast the currency will be more resilient than previously anticipated given a less hawkish outlook for U.S. and Canadian monetary policy.
The median forecast in a survey released on Thursday of more than 50 economists and currency strategists was for the Canadian dollar to trade at $1.030 (Canadian) to the U.S. dollar in one month, or 97.09 U.S. cents.
The currency traded around $1.0337 (Canadian) early on Thursday.
Those polled expect the loonie will weaken to $1.040 (Canadian) in the next three months, but see it then holding at that level six and 12 months from now.
That is slightly stronger than what economists had expected in September’s poll, which had analysts calling for the Canadian dollar to fall to $1.050 (Canadian) in six months and $1.045 in a year.
“The fundamentals of the currency are pretty strong, so I don’t see it moving too much,” said John Clinkard, chief Canadian economist at Deutsche Bank Canada.
Deutsche has forecast the Canadian dollar will weaken from $1.03 (Canadian) to the U.S. dollar a month from now to $1.05 in 12 months.
The main focal point for markets in recent months has been trying to determine when the U.S. Federal Reserve will start to reduce the amount of bonds it is buying to prop up the economic recovery. The U.S. central bank is currently buying $85-billion (U.S.) a month of Treasuries and mortgage-backed securities.
The Fed surprised investors at its September meeting by maintaining its sum of purchases, rather than starting to slowly scale back as had been expected.
With only two meetings left in 2013, and a U.S. government shutdown that was in its third day on Thursday, analysts are starting to speculate whether the central bank will have to wait until early next year to begin its so-called ‘tapering’.
While the start of tapering should be positive for the U.S. dollar, thereby weakening the loonie, the fact that it will also signal strength in the U.S. recovery should mitigate those losses, as it will bode well for Canadian economic growth, said Clinkard.
The United States is Canada’s largest trading partner.
“Since we are essentially the caboose on that train, that would suggest that we would also be experiencing some of the impact of stronger manufacturing, stronger resource demand and that would also limit to some extent the deterioration in our currency,” Clinkard said.
The Canadian currency hit a three-month peak of $1.0182 (Canadian) in the wake of September’s Fed’s announcement to hold bond purchases steady.
A partial federal government shutdown in the United States has made the path of monetary policy even harder to predict as politicians on both sides of the aisle were locked in a budget impasse.
With the potential for a drawn-out shutdown to take a bite out of economic growth, analysts are speculating whether the Fed will hold its current pace of purchases longer than had been expected.
Boston Federal Reserve Bank President Eric Rosengren said on Wednesday that the shutdown could delay the Fed’s ability to assess the state of the economy and potentially delay the decision to reduce stimulus.
At home, investors expect the Bank of Canada has plenty of room to leave interest rates low for some time. On Tuesday, the central bank cut its third-quarter economic growth forecast and said the export sector might recover more slowly than expected.
“We think any near-term policy innovations from the BoC will be dovish,” Credit Suisse analysts Anezka Christovova and Alvise Marino said in an email.
The Swiss bank has forecast the Canadian dollar will weaken from $1.043 (Canadian) to the U.S. dollar a month from now to $1.08 a year out.