Currency analysts expect the loonie to hit $1.35, or 74.07 cents U.S., in three months
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Dec 07, 2022 • 1 day ago • 2 minute read
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The loonie has weakened over seven per cent against the U.S. dollar since the start of 2022. Photo by Mark Blinch/Reuters files TORONTO — The Canadian dollar will rally over the coming year as major commodity consumer China loosens its COVID-19 restrictions and the United States Federal Reserve potentially concludes its campaign to increase interest rates, a Reuters poll showed.
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The loonie has weakened over seven per cent against the U.S. dollar since the start of 2022, with almost all of the decline coming since mid-August.
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According to the median forecast of 35 currency analysts surveyed Dec. 1-6 the currency will rebound 1.1 per cent to $1.35 per U.S. dollar, or 74.07 cents U.S., in three months, compared with November’s forecast of $1.36.
It was then expected to strengthen to $1.30 in a year.
“Our forecast for a weaker (U.S.) dollar in 2023 against major currencies, as the Fed switches gears and telegraphs an end to its tightening cycle, and a better growth outlook in Canada should bolster the Canadian dollar,” said Abbey Omodunbi, senior economist at The PNC Financial Services Group.
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Canada’s economy grew at an annualized rate of 2.9 per cent in the third quarter, much stronger than both analysts and the Bank of Canada were expecting.
The Bank of Canada has raised its benchmark interest rate by 400 basis points since March to 4.25 per cent, its highest level since 2008, in an attempt to cool inflation.
Canada is a major exporter of commodities, including oil. They have pulled back from their peak levels this year but moves by China to ease pandemic restrictions could improve the demand outlook.
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Along with a more stable path for U.S. interest rates it “should help the loonie rally closer to fair value,” Zhao-Murray said.
Measures of fair value include purchasing power parity (PPP), or the exchange rate that equalizes the purchasing power of separate currencies.
The IMF estimates the PPP of USD-CAD to be $1.25, over eight per cent stronger than its current level.
© Thomson Reuters 2022