Analysts are sticking with bullish forecasts on the Canadian dollar despite uncertainty related to the Omicron COVID-19 variant, expecting oil prices to rebound and the Bank of Canada to hike interest rates before the U.S. Federal Reserve.
The median forecast in a Reuters poll of 32 strategists was for the Canadian dollar to strengthen 2.4% to 1.25 per U.S. dollar, or 80 U.S. cents in three months, compared to 1.24 in last month’s forecast.
It was then expected to firm to 1.23 in a year’s time.
“We expect the Bank of Canada to raise rates ahead of the Fed next year and expect oil prices will rebound from where they are presently,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. “Those are both positive factors for the loonie.”
In October, the Bank of Canada became the first central bank from a G7 country to exit quantitative easing and signaled it could begin raising interest rates in April. It is due to make an interest rate decision next week.
Money markets expect the BoC to hike five times next year - much more tightening than is seen from the Federal Reserve.
Data this week showed Canada’s economy grew at an annualized rate of 5.4% in the third quarter, beating analyst expectations, and growth most likely accelerated in October on a manufacturing rebound.
“Canada is quite far along in the pandemic recovery compared to most other OECD recoveries and it should benefit from inbound foreign direct investment next year, which is probably going to surge,” Anderson said.
Recent flooding in the western province of British Columbia that cut off a major port from the rest of Canada could weigh on fourth-quarter growth.
In addition, the price of oil, one of Canada’s major exports, has tumbled around 20% since October, pressured by rising coronavirus cases in Europe and the detection of the possibly vaccine-resistant Omicron variant.
But analysts expect the loonie to cope.
“We’ve taken lessons from the past in that any severe impact posed by variants is phased out and then overlooked by markets,” said Simon Harvey, senior FX market analyst for Monex Europe and Monex Canada.
“In our 2022 forecasts, we envisage an improvement in global growth conditions, and thus demand for oil, and a return by hawkish central banks to their normalization cycles.”
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