The Canadian dollar is set to rise later this year as the global economic outlook turns more favorable for commodity-linked currencies and investors bet central banks will cut interest rates in 2024, according to a Reuters poll released on Wednesday.
In three months, however, the loonie is set be little changed at 1.34 per U.S. dollar, or 74.63 U.S. cents, according to the median forecast from currency analysts, though that was slightly stronger than January’s forecast of 1.35.
The loonie was then expected to strengthen to 1.30 in a year, a gain of just over 3 per cent, but unchanged from the January poll forecast.
“China is one of the big fundamental drivers for why there is growing optimism ... With that demand coming back, it’s going to be supportive of the global economy and it could be a boost to pro-cyclical currencies,” said Jay Zhao-Murray, market analyst at Monex Canada Inc.
The rapid reopening of the world’s No. 2 economy is likely to fuel demand for commodities produced in abundance by Canada, potentially helping to avoid a recession as long as it does not also force up inflation and spur further interest rate hikes.
Other commodity-linked currencies, such as the Australian dollar, and emerging market currencies are also expected to benefit from China’s reopening, according to the broader monthly Reuters foreign exchange poll.
The Bank of Canada last month became the first major central bank to pause its tightening campaign, saying it would take time to assess how well rate increases are working to bring inflation down.
“Central banks are starting to pause, and I think that is going to create a bit more of a supportive environment for cyclical currencies like the loonie, especially in the second half of the year,” Mr. Zhao-Murray said.
The U.S. Federal Reserve, the European Central Bank and the Bank of England have laid the groundwork for a pause as well, although they are not done raising rates.
With the end of tightening in sight, money markets are betting the Fed and the BoC will shift to cutting rates by the end of the year and then ease more forcefully in 2024.
Stocks are likely to benefit later this year from the prospect of “an eventual reflationary dynamic,” said Mazen Issa, senior FX strategist at TD Securities in New York.
“That should also help to support non-dollar currencies, so anything like the Canadian dollar.”
The loonie tends to have a strong positive correlation with equity markets.
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