Home Forex News Canadian dollar outlook dims on expected interest rate divergence

Canadian dollar outlook dims on expected interest rate divergence

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By Fergal Smith

TORONTO (Reuters) – The Canadian dollar is set to strengthen less than previously expected over the coming year if the Bank of Canada begins cutting interest rates ahead of the Federal Reserve and the U.S. election raises global trade uncertainty, a Reuters poll found.

According to the median forecast of 40 foreign exchange analysts in the May 31-June 4 poll, the loonie will be little changed at 1.37 per U.S. dollar, or 73.17 U.S. cents, in three months, compared to 1.36 in last month’s poll.

It was then predicted to advance 2.5% to 1.33 in a year, versus 1.32 expected previously.

The Canadian central bank will trim interest rates to 4.75% later on Wednesday, according to three-quarters of economists in a separate Reuters poll which showed three further cuts this year.

Money markets expect 65 basis points of easing by the BoC this year compared to 45 basis points from the Fed.

“You are just too far away from Fed cuts at this point whereas the Bank of Canada is more imminent,” said Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets.

“While some of that rate differential is priced in, it’s likely to go a little bit further, which is not going to be positive for the Canadian dollar near-term.”

The Canadian central bank would be willing to cut interest rates three times ahead of the Fed’s first move before a declining currency threatens to endanger the inflation outlook, a recent straw poll of analysts showed.

The U.S. election in November could be an additional headwind for the Canadian dollar if it were to lead to increased tariffs that reduce prospects for global trade, say analysts.

Canada is a major producer of commodities and sends about 75% of its exports to the United States.

“It’s one more reason to be cautious with your outlook,” Reitzes said.

(For other stories from the June Reuters foreign exchange poll:)

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