The Canadian dollar, this year’s top-performing G10 currency, is expected to strengthen further over the coming 12 months, supported by higher oil prices and the Bank of Canada’s recent shift to a more hawkish stance.
The median forecast of 36 strategists in a Reuters poll taken between Oct. 29 and Nov. 2 was for the Canadian dollar to be at 1.24 per U.S. dollar, or 80.65 U.S. cents in three months, about its current level, compared with 1.25 in last month’s poll.
It was then expected to strengthen 1.6% to 1.22 in a year’s time. In October, the forecast was for 1.23.
The loonie has gained 2.6% so far in 2021. In June, it touched a six-year high near 1.20.
That’s a level that could be revisited should the Bank of Canada begin “a relatively aggressive tightening cycle,” said Shaun Osborne, chief currency strategist at Scotiabank.
The Bank of Canada last week became the first central bank from a G7 country to exit quantitative easing and signaled it could begin raising interest rates in April, three months earlier than previously thought.
Money markets expect lift-off as soon as March and about 125 basis points of tightening in total next year, while the gap between Canadian and U.S. 2-year yields has climbed to as high as 60 basis points in favor of the Canadian bond in recent days, the biggest gap in seven years.
Canadian employment data for October are due on Friday, which could offer further clues on the outlook for rates.
“Higher oil prices and favorable interest rate spreads have helped the loonie recently,” said Hendrix Vachon, a senior economist at Desjardins. “According to historical relations, it still has some room left for further appreciation.”
In 2014, when oil, one of Canada’s major exports, was last trading above $80 a barrel, the Canadian dollar was at about 1.13.
The Federal Reserve could give the U.S. dollar a boost by starting to taper its bond-buying program and moving closer to rate hikes, but analysts expect the loonie to cope.
“Decent growth in Canada, higher interest rates than much of the rest of the G10, and firm commodity prices,” are supportive of the currency, Scotiabank’s Osborne said.
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