Loonie forecasts turn less bullish amid surprising slack
There is less upside for Canada's dollar over the coming year, according to analysts who are weighing the effect of a surprise contraction in the economy and signs of a cooler housing market on the Bank of Canada's policy outlook, a Reuters poll showed.
With about 68 per cent of its population fully vaccinated against COVID-19, Canada's economy could be positioned better than some others to cope with a fourth wave of the virus.
Still, the economy surprisingly shrank in the second quarter, when lockdowns were in place, and likely had far less momentum than had been expected heading into the summer, data showed on Tuesday.
The Bank of Canada had expected second-quarter growth of two per cent, so the data could cause it to raise its estimate of the economy's spare capacity.
That's crucial because the BOC has pledged to keep interest rates on hold until slack is absorbed, which would occur in the second half of 2022 according to the central bank's latest forecast.
The data “does create a bit of a question mark about just how quickly the Bank of Canada will raise interest rates going forward,” said Shaun Osborne, chief currency strategist at Scotiabank. “It does raise the risk of maybe a slightly more dovish than we are currently expecting Bank of Canada, at least on the messaging front.”
The currency's median forecast of 36 strategists, polled Aug. 30Sept. 2, was for the Canadian dollar to strengthen around 1.6 per cent in three months to 1.2350 per U.S. dollar, or 80.97 U.S. cents, compared to 1.2250 in last month's poll.
It was then expected to rise further to 1.22 in a year's time. In August, the forecast was 1.21. The currency has gained 1.4 per cent since the start of the year, the best performance among G10 currencies.