Canadian Dollar Expected to Strengthen Amidst Economic Uncertainty

Canadian Dollar Set for Gains Despite Mortgage Renewals

The Canadian dollar is anticipated to strengthen over the coming year, buoyed by expected interest rate cuts by the U.S. Federal Reserve. However, gains may be limited due to the impact of mortgage renewals on household spending and economic growth, as revealed by a recent Reuters poll.

Forecasts and Predictions for the Canadian Dollar

According to the poll, 40 foreign exchange analysts predicted a 0.7% strengthening of the Canadian dollar to 1.34 per U.S. dollar, or 74.63 U.S. cents, in the next three months. This forecast aligns with the previous month’s projections. The currency is then expected to advance to 1.30 in a year, mirroring the earlier forecast.

Factors Affecting the Canadian Dollar’s Prospects

The anticipated strengthening of the Canadian dollar is in line with forecasts of a broader decline in the U.S. dollar. Analysts attribute this trend to the expected slowing of U.S. economic growth and potential rate cuts by the Federal Reserve. Additionally, the Canadian economy, being a major commodities producer, is poised to benefit from an improved global outlook. However, the pace of mortgage renewals is expected to act as a deterrent to economic growth.

Impact of Mortgage Renewals on the Canadian Economy

Canada’s mortgage cycle, characterized by short loan terms, is likely to impact economic growth. With many households set to renew their mortgages at higher rates after significant borrowing during the pandemic, the economy may face constraints. This, coupled with the Canadian dollar’s lower sensitivity to fluctuations in the U.S. dollar compared to other Group of Ten (G10) peers, may limit the currency’s gains.

Expert Insights on the Canadian Dollar’s Performance

According to Jayati Bharadwaj, a global FX strategist at TD Securities, the Canadian dollar is expected to appreciate in line with the broader U.S. dollar outlook. However, it may not emerge as the top performer among G10 currencies due to the impact of mortgage renewals and its subdued sensitivity to U.S. dollar movements.