Forex world

December 07, 2022

Canadian dollar seen higher

Canada's dollar will rally over the coming year as major commodity consumer China loosens its COVID-19 restrictions and the Federal Reserve potentially concludes its campaign to increase interest rates, a Reuters poll showed.

The loonie has weakened over 7% against the U.S. dollar since the start of 2022, with almost all of the decline coming since mid-August.

According to the median forecast of 35 currency analysts surveyed Dec. 1-6 the currency will rebound 1.1% to 1.35 per U.S. dollar, or 74.07 U.S. cents, 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 (NYSE:PNC).

Canada's economy grew at an annualized rate of 2.9% in the third quarter, much stronger than both analysts and the Bank of Canada were expecting.

The BoC has raised its benchmark interest rate by 350 basis points since March to 3.75%, its highest level since 2008, in an attempt to cool inflation.

Money markets expect at least another quarter-percentage-point of tightening when the bank meets to set policy on Wednesday.

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.

"China's re-opening following stringent COVID lockdowns will boost global growth, commodity demand, and risk sentiment," said Jay Zhao-Murray, a market analyst at Monex Canada Inc.

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 8% stronger than its current level.

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