Fergal Smith
TORONTO (Reuters) – The Canadian dollar will strengthen next year if the U.S. Federal Reserve cuts interest rates as expected, but its gains could be capped as an extension of mortgage lending puts pressure on household spending and economic growth, a Reuters poll showed.
The average forecast of 40 currency analysts polled in a survey Feb. 1-6 was for the dollar to strengthen 0.7% to 1.34 per U.S. dollar, or 74.63 U.S. cents, in three months, in line with the forecast January survey.
It was then forecast to rise to 1.30 a year later, also in line with the previous month’s forecast.
The expected strengthening comes against the backdrop of some analysts’ forecasts of a large-scale fall in the US dollar.
The dollar is likely to weaken in 2024 as U.S. economic growth slows to a pace more in line with the rest of the world and the Fed begins to cut rates, said Jayati Bharadwaj, global currency strategist at TD Securities, adding that markets could then focus on stimulating economic growth through “global easing cycles.”
Canada is a major producer of commodities, including oil, so its economy could benefit from an improving global outlook. However, analysts expect the pace of mortgage renewals to hold back the country’s economy.
The mortgage cycle in Canada is especially short—the typical loan term is 5 years or less, compared with 30 in the United States—and many households are likely to renew at higher rates after taking out large loans at minimal levels during the pandemic.
The upcoming mortgage reset and the Canadian dollar’s lower sensitivity to dollar changes than some other Group of Ten (G10) countries could limit the currency’s gains, Bharadwaj said.
“We expect the Canadian dollar to strengthen against our overall outlook for the U.S. dollar, but it is unlikely to outperform the G10,” Bharadwaj said.
(For other stories from the February Reuters FX survey:) (This article has been republished to remove quotation marks in the first sentence in paragraph 5)