A new poll by Reuters predicts that the Canadian dollar will gain ground against its U.S. counterpart over the coming year.
Poll responses suggest the Canadian dollar will strengthen one per cent, to 1.32 per U.S. dollar, or 75.76 U.S. cents, in one month. The Canadian dollar is then expected to gain further to a little over 1.3 in 12 months, which is about the same level as the median projection in September’s survey.
Scotiabank is pinning its forecast “on the fundamentals pulling through and from that perspective we do expect a modest appreciation in the CAD over the medium term,” said Shaun Osborne, chief currency strategist at the bank. “We think that the CAD is undervalued at these levels.”
The loonie is trading at less than its potential valuation because of an uncertain outlook for global trade, Osborne said.
Canada is more dependent on trade than some other countries, including the U.S. At Cdn$1.5 trillion, trade of goods and services, including oil and motor vehicles, accounted for 66 per cent of Canada’s economy in 2018, according to government data.
Still, the Canadian dollar and the Japanese yen have been the only G10 currencies to gain ground this year against the U.S. dollar, with the loonie up more than two per cent.
Canada’s economy expanded at an annualized rate of 3.7 per cent in the second quarter, while the economy has been adding jobs this year at a strong pace and inflation is close to the Bank of Canada’s target of two per cent.
This week, Canada’s two-year Treasury yield climbed above its U.S. equivalent for the first time in nearly two years, having traded as much as 84 basis points below in March.
The Bank of Canada has been concerned that trade conflicts are weighing more heavily on the global economy. But the central bank has shown no appetite for cutting interest rates despite easing this year by some global peers, including the Federal Reserve and the European Central Bank.
The economic data “suggests that the BoC can buck the dovish tone from other global central banks and keep rates on hold for now,” said George Davis, chief technical strategist at RBC Capital Markets. “We expect this policy divergence to provide the scope for some CAD appreciation in Q4.”