Canadian dollar to strengthen as BoC moves 'aggressively' on rate hikes: poll

Falling Canadian dollar coins or loonies are pictured in North Vancouver, B.C., May 29, 2019. THE CANADIAN PRESS/Jonathan Hayward

TORONTO — The Canadian dollar will gain ground over the coming year as high commodity prices bolster Canada's economic outlook and the Bank of Canada likely continues to raise interest rates aggressively, a Reuters poll showed.

The loonie is the only G10 currency to keep pace with the U.S. dollar, a magnet for safe-haven flows, in 2022.

The median forecast in the poll was for Canada's currency to strengthen 0.4 per cent to 1.26 per U.S. dollar, or 79.37 U.S. cents, in three months' time, compared to 1.2568 in last month's forecast. It was then expected to climb to 1.23 in a year's time.

"I think there (are) pretty solid reasons to be constructive on the CAD in the medium term," said Shaun Osborne, chief currency strategist at Scotiabank.

"The Bank (of Canada) is taking a very proactive approach to policy making... Monetary policy is potentially going to move a little bit more quickly and maybe a bit more aggressively than the Fed (U.S. Federal Reserve) in the next six months."

The BoC opened the door to a more aggressive pace of tightening on Wednesday, saying it was prepared to act "more forcefully" if needed to tame inflation, even as it went ahead with a historic second consecutive half-percentage-point rate increase, lifting its benchmark rate to 1.50 per cent.

Money markets expect the policy rate to reach 3 per cent by December.

Some analysts expect Canada's economy to be particularly sensitive to higher interest rates after Canadians borrowed heavily during the pandemic to participate in a red-hot housing market.

The housing boom is expected to end next year, a Reuters poll of property experts found.

Still, Canada's gross domestic product grew at an annualized rate of 3.1 per cent in the first quarter, helped by buoyant domestic demand. That compares favourably to a contraction in the United States.

"The (Canadian) economy itself is doing very well," Osborne said. "I think from a commodity, terms of trade, point of view, there is a good news story there to tell for Canada."

Terms of trade is the ratio of export prices to import prices. An improvement makes a country wealthier.

The price of oil, one of Canada's major exports, has soared more than 50 per cent since the start of the year as Western sanctions on Russia have disrupted supplies.

(Reporting by Fergal Smith; polling by Susobhan Sarkar and Swathi Nair in Bengaluru; editing by Jan Harvey)