The Canadian dollar is expected to underperform a September projection for the upcoming year as a result of recent strong declines and the Bank of Canada's threat to send the domestic economy into recession, according to a Reuters poll.
The euro has lost around 7% of its value versus the US dollar since the beginning of 2022, but it has performed better than all other G10 currencies save for the Swiss franc, even if the majority of that loss has occurred since mid-August.
At 1.3838 per US dollar, or 72.26 US cents, on Friday, it reached its lowest point in more than two years.
“CAD will still face some challenges heading into year-end and early 2023, as BoC rate hikes are expected to result in a mild recession in Q2 and Q3 2023,” said George Davis, chief technical strategist at RBC Capital Markets.
To tackle inflation, Canada’s central bank has raised interest rates by 300 basis points since March to 3.25% – a 14-year high. It says it can slow growth without tanking the economy.
The median forecast of currency analysts was for the Canadian dollar to strengthen 1.6% to 1.34 per U.S. dollar in three months’ time, compared with the September forecast of 1.30.
It was then expected to advance to 1.30 in one year. The same forecast in last month’s poll was 1.25.
Canada is a major producer of commodities, including oil which has rallied this week as OPEC+ agreed to its deepest cuts to production since the COVID pandemic.
But the prospect of further gains for crude could depend on whether the Federal Reserve continues with its current course of aggressive tightening.
“As we see more concern about global growth kicking in and it becomes clear the Fed isn’t going to pivot I think we could see speculators pushing oil lower,” said Christian Lawrence, senior cross-asset strategist at Rabobank.
Money markets are betting the Fed will end its tightening cycle with a higher policy rate than the BoC, an outcome that could spell more trouble for the loonie.
“There is more interest rate sensitivity in the Canadian economy than the U.S. economy,” Lawrence said. “I think the Bank of Canada stops hiking before the Fed.”