TORONTO: The Canadian dollar is expected to rally further over the coming year as a global economic recovery takes hold, and the gains could accelerate if investors perceive the Bank of Canada is preparing to reduce monetary stimulus, strategists say.

The median forecast of nearly 40 analysts in a Reuters poll was for the loonie to strengthen 1% to 1.27 per US dollar, or 78.74 US cents, in three months, matching the forecast in January’s poll. It is then expected to gain to 1.25 in one year.

“Global reflation and commodity price support are very likely this year and hence CAD direction is clear - the pace is the only debate,” said Derek Halpenny, head of research, global markets EMEA and international securities, at MUFG Bank.

Canada is a major producer of commodities, including oil, which has climbed about 17% since the start of January. It reached a one-year high on Friday above $56 a barrel as the Organization of the Petroleum Exporting Countries and its allies decided to stick to output cuts.

Economists in a Reuters poll forecast last month that global growth would rise 5.3% this year after shrinking 3.9% in 2020, helped by COVID-19 vaccine breakthroughs and accommodative monetary policies.

The Bank of Canada has indicated it will hold its benchmark interest rate at a record low of 0.25% until 2023, but money markets have been pricing in the chance of an earlier increase.

“I don’t see rates moving higher this year but (BoC) communications could fuel expectations that help provide more support for CAD than we currently assume,” Halpenny said.

Strategists say the central bank could reduce the pace of its quantitative-easing purchases in the coming months. It owns nearly 40% of government bonds outstanding, up from 14% at the beginning of last year.