Canadian dollar seen higher if recession fears fade

Analysts expect the Canadian dollar to rally over the coming year, betting the threat of recession will ease as the US Federal Reserve and the Bank of Canada likely wind down rate-hike cycles in 2023, a Reuters poll showed.

The loonie has outperformed most G10 currencies in 2022, but has weakened 1.7per cent against its broadly stronger US counterpart .

“USD strength comes from both Fed rate hikes as well as fears that those hikes will provoke a recession in 2023,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.

“If and as those fears fade in 2023, with the Fed and BoC going on hold, the USD should fade lower and USD-CAD should revert toward its long-run average, and where it should be based on excellent Canadian currency fundamentals.” The median forecast in the poll was for Canada’s currency to edge 0.3per cent higher to 1.28 per US dollar, or 78.13 US cents, in three months’ time, matching July’s forecast. It was then expected to climb to 1.25 in one year.

The Canadian economy grew at an annualized rate of 4.6per cent in the second quarter, a preliminary estimate showed last week. That contrasts with a second straight quarterly contraction in the United States and supports further tightening by the Bank of Canada as it tackles multi-decade high inflation.