Analysts expect the Canadian dollar to rally over the coming year, betting the threat of recession will ease as the U.S. 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 1.7% against its broadly stronger U.S. 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 0.3% higher to 1.28 per U.S. dollar, or 78.13 U.S. 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 4.6% 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.
Money markets expect interest rate hikes by the BoC and the Fed to peak in the first half of next year.
The price of oil, one of Canada's major exports, has pulled back from its March peak but has still climbed 20% this year to above $90 a barrel. The last time oil was trading at such levels, in 2014, the Canadian dollar was around 1.10 per greenback.
Abbey Omodunbi, senior economist at PNC Financial Services Group, expects high energy prices to support Canada's economy and the U.S. dollar to give back some recent gains as inflation likely cools later this year.
