Canadian Dollar Forecasts Rise on U.S. Infrastructure Hopes
Toronto – A growing consensus amongst financial analysts is pointing towards a strengthening Canadian dollar, driven largely by optimistic expectations surrounding the proposed U.S. infrastructure spending package. Recent polling data reveals a significant upward revision in forecasts, reflecting a heightened belief that increased government investment in the United States will positively impact the global economy and, consequently, bolster the value of the Loonie. The Canadian currency has already experienced substantial gains this year, climbing approximately 5% against the U.S. dollar, largely fueled by robust commodity prices and the Bank of Canada’s more cautious monetary policy.
The median forecast of nearly 40 strategists, compiled between May 28th and June 3rd, now anticipates a pullback of around 0.6% for the Canadian dollar over the next three months, projecting a rate of 81.96 U.S. cents, compared to the 82.64 U.S. cents observed on Thursday. Crucially, this forecast represents a notable shift upwards from the 80.64 U.S. cents predicted in last month’s poll. Moreover, the longer-term outlook has also been revised, with predictions now indicating an expected rate of 82.64 U.S. cents one year from now, a rise from the previously forecasted 80.64 U.S. cents. This revised outlook reflects a belief that commodity prices will maintain elevated levels as the global economy continues its recovery.
Several key factors are supporting these more optimistic forecasts. U.S. President Joe Biden remains committed to pursuing a large-scale infrastructure spending plan, potentially totaling around US$1.7 trillion, and ongoing negotiations with Republican lawmakers indicate a pathway toward eventual agreement. Canada, as a leading exporter of commodities, including copper and oil, stands to benefit directly from increased demand and economic activity in the United States. Crude oil prices, for instance, recently touched their highest levels since October 2018, reaching US$69.40 a barrel, further bolstering the bullish sentiment surrounding the Canadian dollar.
Shaun Osborne, chief currency strategist at Scotiabank, emphasized the significance of the U.S. infrastructure spending. “You’ve got all the support that is expected to come from infrastructure spending in the U.S.,” he stated. “This will continue to fuel demand for Canadian commodities, particularly oil.” Furthermore, the Bank of Canada’s actions are also playing a role. The central bank recently became the first major central bank to reduce its bond-buying program, a move perceived positively by currency traders.
While the Canadian economy experienced a contraction in April, marking the first decline in a year due to widespread lockdowns associated with the third wave of the coronavirus pandemic, economists remain optimistic about the country’s growth prospects. The Bank of Canada’s projected growth rate for the year stands at 6.5%, a robust figure that supports the anticipated strength of the Canadian dollar. The Bank of Canada is expected to continue its tapering of its bond purchases in the third quarter, aligning itself with similar moves by the Federal Reserve. In contrast to the Federal Reserve, which has maintained its current pace of bond purchases, signaling a more patient approach to monetary policy.
Simon Harvey, a senior FX market analyst at Monex Europe and Monex Canada, highlighted this divergence, stating, “We still think the Bank (of Canada) continues to taper ahead of the Fed. We are still looking for a bit more strength in CAD in the second half of the year and into early 2022.” These views suggest that the Canadian dollar is likely to outperform the U.S. dollar in the coming months and into the early part of 2022. © Thomson Reuters 2021.
