Canada’s dollar will strengthen over the coming year as rising investor appetite for risk counters a slowdown in the domestic economy that could crimp interest rate hikes from the Bank of Canada, a Reuters poll of currency strategists showed.
Taken Feb. 28 to March 5, the poll of more than 40 currency analysts predicted the loonie would strengthen to 1.29 to the U.S. dollar in 12 months, or 77.52 US cents.
That is weaker than the 1.28 (78.12 US cents) forecast in February’s poll, but would leave the currently up about 3.8 per cent from Wednesday’s level of 1.34.
Although the loonie has lost some ground in recent days, it has still climbed about 2 per cent since the start of the year, the second best performance, after sterling, among Group of 10 currencies.
“The external environment has got much more supportive for the Canadian dollar,” said Mark McCormick, North American head of FX Strategy at TD Securities. "Global risk appetite is, on our metrics, the strongest it has been in years."
Canada is running a current account deficit and exports many commodities, including oil, so its economy could benefit from an improved outlook for the global flow of capital or trade.
Optimism that the United States and China could reach a deal on trade and signals from the Federal Reserve it would be patient on raising interest rates further have helped global stocks rally since the start of the year.
Meanwhile, the price of oil has rebounded more than 30 per cent since plunging to an 18-month low in December.
Oil is traded in U.S. dollars, so the strengthening of the greenback since the start of 2018 could also be a boost for Canada's economy.
"We are looking at terms of trade-driven strength, whether you are looking at things like oil prices or some of the other major commodities that form a key component of our terms of trade," said Eric Theoret, a currency strategist at Scotiabank.
Still, a weakening of the domestic economy has prompted investors to slash bets for further interest rate hikes from the Bank of Canada. The central bank has tightened by 125 basis points since July, 2017 (100 basis points equals one percentage point).
Canada’s economic growth slowed more than expected in the fourth quarter to a 0.4-per-cent annualized pace on plunging Canadian crude oil export prices, data on Friday showed.
The central bank may be closer to a policy turning point, as there is now a small chance of an interest rate cut this year, according to economists polled by Reuters.
“The external story is good, the local story is pretty bad and the bank is leaning a bit more on the local story,” TD’s Mr. McCormick said.