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The Canadian dollar is expected to give back some of its recent gains over the coming year as the Bank of Canada’s more hawkish stance is offset by potential dialing back of the U.S. Federal Reserve’s asset purchase program, a Reuters poll showed.

The median forecast of nearly 40 strategists in the May 3-5 poll was for the Canadian dollar to weaken 1 per cent over the next three months to 1.24 per U.S. dollar, or 80.65 U.S. cents. It is then expected to trade at that same level in one year, compared to 1.23 seen in April’s poll.

“We think a lot of good news is in the price of the CAD, so we look for a little bit of tactical softening,” said Mazen Issa, senior FX strategist at TD Securities in New York.

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The loonie has climbed 3.7 per cent since the start of the year, the biggest gain among G10 currencies. On Wednesday, it touched its strongest intraday level since February 2018 at 1.2252.

The currency has been bolstered by higher prices for commodities such as oil, one of Canada’s major exports, and an improved outlook for the domestic economy as the rollout of the COVID-19 vaccine gathers pace.

In addition, the Bank of Canada last month changed its guidance to show it could start raising its benchmark interest rate from a record low of 0.25 per cent in late 2022. It also tapered its bond purchases, becoming the first major central bank to cut back on pandemic-era money-printing stimulus programs.

Analysts say the Federal Reserve could follow the BoC’s lead.

“We think that the odds are increasing that the Fed will have to acknowledge the strength in the U.S. economy and hint at a taper in late summer/early fall,” said George Davis, chief technical strategist at RBC Capital Markets.

“This would lead to a re-pricing in U.S. interest rate expectations that would be expected to boost the USD as the timing for U.S. rate hikes is brought forward.”

The U.S. central bank’s current guidance is to leave interest rates on hold until at least 2024.

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Money markets expect two Bank of Canada rate hikes in 2022, as opposed to one from the Fed, reflecting the Canadian central bank’s more hawkish guidance, but past tightening cycles show that faster liftoff for the BoC may not be sustained.

“Things are not moving in isolation,” Issa said. “At the end of the day, FX is a relative game.”

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