Bank of Canada moves and potential trade issues from the US election may limit the loonie’s gains
The Canadian dollar may strengthen less than previously expected over the coming year if the Bank of Canada cuts interest rates ahead of the Federal Reserve and the US election increases global trade uncertainty, according to a Reuters poll.
The median forecast of 40 foreign exchange analysts in the May 31 - June 4 poll indicates the loonie will remain largely unchanged at 1.37 per US dollar, or 73.17 US cents, in three months, compared to 1.36 in the previous month's poll.
Analysts now predict the loonie will advance 2.5 percent to 1.33 in a year, versus the previously expected 1.32.
Three-quarters of economists in a separate Reuters poll expected the Bank of Canada to cut interest rates to 4.75 percent last Wednesday, with three additional cuts anticipated this year. Money markets forecast 65 basis points of easing by the BoC this year, compared to 45 basis points from the Fed.
Benjamin Reitzes, Canadian rates, and macro strategist at BMO Capital Markets, noted that the Bank of Canada is closer to implementing rate cuts than the Fed.
“While some of that rate differential is priced in, it's likely to go a little bit further, which is not going to be positive for the Canadian dollar near-term,” he said.
A recent straw poll of analysts suggests that the Canadian central bank may cut interest rates three times before the Fed makes its first move, potentially impacting the inflation outlook if the currency declines.
The upcoming US election in November could pose an additional challenge for the Canadian dollar if increased tariffs reduce prospects for global trade. Canada, a major producer of commodities, sends about 75 percent of its exports to the US.
Reitzes advised caution regarding the outlook, stating, “It's one more reason to be cautious with your outlook.”
