Canadian dollar forecasts grow more bullish as economy strengthens

TORONTO: Analysts have raised their Canadian dollar forecasts for the coming year, expecting the currency to benefit from faster growth in the domestic economy and a potential reduction by the Bank of Canada of its bond purchases, a Reuters poll showed.

The loonie advanced 1.4% against the US dollar in the first quarter, its fourth straight quarterly gain and the best performance among the G10 currencies.

The median forecast of more than 30 strategists was for the Canadian dollar to rise a further 0.6% over the next three months to 1.25 per US dollar, or 80 US cents.

It was then expected to climb to 1.23 in one year, compared with a 1.25 forecast in March's poll.

"We expect the Canadian dollar to be a general outperformer among the G10 over the coming year," said Erik Nelson, a currency strategist at Wells Fargo in New York.

"Canada's economy looks poised to enjoy one of the strongest growth rebounds this year thanks to a combination of domestic fiscal support, higher commodity prices and spillover from US demand."

Canada sends about 75% of its exports to the United States, including oil, which has soared about 80% since last November.

Data on Wednesday showed Canada's economy expanded for a ninth consecutive month in January and most likely grew in February, adding to evidence a recovery from the coronavirus pandemic was stronger than expected.

That could encourage Canada's central bank to dial back the pace of stimulus.

"The Bank of Canada is likely to be among the first to taper asset purchases, furthering yield support for the loonie," Nelson said.

Strategists expect the bank to cut this month the amount of bonds it buys each week to C$3 billion from C$4 billion. Canada's 5-year yield trades about 7 basis points above the equivalent US rate.

The country is facing a potential third wave of COVID-19 infections. Still, vaccine supplies are picking up, which could help narrow the economic advantage of the United States, one of the countries with the fastest rollouts.

"The US economy will likely do well in the short term, but several other countries will be following in its wake soon as vaccination will progress," said Hendrix Vachon, a senior economist at Desjardins.