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Canadian Dollar Expected to Trade at Resilient Levels
A recently conducted Reuters poll indicates that the Canadian dollar is projected to trade at robust levels in the forthcoming months and year if the U.S. Federal Reserve reduces interest rates before the Bank of Canada does. The currency garnered a 2.3% increase against the U.S. dollar in 2023, as the likelihood of rate cuts invigorated investor confidence in the last two months of that year.
Despite retracting some of these gains, the loonie is projected to soften by an extra 0.4% within three months to hit 1.3400 per U.S. dollar, equivalent to 74.63 U.S. cents. This is based on the median projection of 42 foreign exchange analysts who participated in the poll conducted between Jan. 2-4.
Forecast Predicts Loonie Strength Above Prior Projections
However, this would still position the loonie at a stronger stance than the December prediction of 1.3533. The currency is subsequently anticipated to progress to 1.3000 within a year, compared to the initial forecast of 1.3130 in the previous month.
"We assume that rate reductions might occur somewhat earlier, perhaps at a swifter pace in the U.S. in relation to the rest of the globe," stated Shaun Osborne, Chief Currency Strategist at Scotiabank. "We expect that some tightening in yield spreads will play a significant role in buttressing the Canadian dollar."
Speculations and Consequences of U.S. Central Bank Easing
From the review of minutes from the Fed's December assembly, clear indications of when rate reductions might commence were not evident. However, there was an increased impression that inflation is under control and growing apprehension concerning the potential drawbacks of an "unnecessarily restrictive" monetary strategy on the economy.
Financial markets are speculating that the U.S. central bank will commence the easing process as early as March and cut rates by approximately 150 basis points in total in 2024. The odds are favoring an April start for the initial rate reduction by the BoC, with an anticipation of roughly 110 basis points of BoC easing this year.
Role of Canada as a Major Commodity Producer
Canada's prominent role as a commodity producer, notably oil, suggests that its currency could additionally prosper if potential slashes in the Fed rate stimulates the U.S. and global economies. "If we can fend off a (U.S.) recession, maintaining growth should provide some level of support to high beta currencies, commodity currencies, and commodity prices," added Osborne.
