Canadian Dollar Forecasts Turn Less Bullish as BoC Rate Cuts Eyed: Reuters Poll
Facing Economic Slowdown
Analysts are now less optimistic about the Canadian dollar’s prospects over the next year due to recent data indicating a slowdown in the domestic economy. This has led to a revised expectation for the Bank of Canada to implement interest rate cuts, as revealed by a Reuters poll.
Revised Forecasts
The median forecast of 35 foreign exchange analysts in the Dec. 1-5 poll anticipates the Canadian dollar to strengthen by 0.4% to 1.3533 per U.S. dollar, or 73.89 U.S. cents, in the next three months, compared with 1.3450 in a previous poll. In the following year, it is expected to advance to 1.3130, compared to last month’s forecast of 1.3000.
Challenges Ahead
Simon Harvey, head of FX analysis for Monex Europe and Monex Canada, expressed concerns, stating, “Our view is the Canadian dollar is going to face a difficult next three months as the data starts to look like the Canadian economy is teetering on the edge of recession if not in a mild recession.”
Impact of Economic Data
The Canadian economy unexpectedly contracted at an annualized rate of 1.1% in the third quarter, indicating a stumble in growth. Soft domestic data has raised expectations of Bank of Canada easing, especially relative to the Federal Reserve, widening rate differentials in favor of USD-CAD.
Expectations and Projections
Money markets anticipate the Canadian central bank to hold its benchmark interest rate at a 22-year high of 5% at a policy announcement on Wednesday, with the possibility of easing policy as early as March next year. Economists also project rate cuts to begin in the second quarter of next year, with borrowing costs expected to decrease by at least one percentage point by the end of next year.
Market Trends
The Canadian 2-year yield has fallen further below its U.S. equivalent in recent weeks, widening the gap to 54 basis points, which is the widest since March. A lower yield tends to make a currency less attractive to investors.
Conclusion
The outlook for the Canadian dollar has become less bullish in light of recent economic indicators and expectations of Bank of Canada interest rate cuts. Analysts are closely monitoring the evolving situation and its potential impact on the foreign exchange market.
