File Photo: A Canadian dollar coin, commonly known as a “loonie,” is featured in this illustrative image taken in Toronto on January 23, 2015. REUTERS/Mark Blinch/File Photo Acquire License Rights
TORONTO, Sept 7 (Reuters) – Analysts have lowered their upbeat near-term forecasts for the Canadian dollar as China’s economy weakens and the gap between US and Canadian bond yields widens, but still expect the currency to return a year from now will be stronger, Reuters poll showed.
The average forecast from nearly 40 FX analysts had the loonie up 1.9% in three months to 1.34 per US dollar, or 74.63 US cents, compared to 1.32 in the previous month’s forecast .
It was then expected to rise to 1.29 within a year, in line with August’s forecast, up 5.8%.
“The madman has lost a few feathers in the past few weeks,” said Stefane Marion, chief economist and strategist at the National Bank of Canada.
“Wide interest rate differentials with the US and weaker commodity prices due to a slowing Chinese economy are keeping the CAD in check.”
China’s economic growth is slowing as policymakers seek to reverse the housing market downturn. Canada is a major commodity producer, so the loonie tends to be sensitive to global growth prospects.
The currency is down about 4% from its July peak, while the Canadian 2-year yield has fallen further below its US equivalent in recent weeks.
On Wednesday, the gap was 36.5 basis points in favor of the US note, the widest since May 3, as the Bank of Canada kept interest rates at a 22-year high of 5% and noted the economy was in crisis phase of weaker growth has entered.
Canada’s economy contracted unexpectedly at an annual rate of 0.2% in the second quarter, and growth is likely to have stagnated in July, data on Friday showed.
Canadian payrolls data for August, due Friday, could provide further clues to the strength of the domestic economy.
High borrowing costs are a major concern for Canadians, who have borrowed heavily during the pandemic to participate in a blistering real estate market and because of a particularly short mortgage cycle.
Almost all Canadian mortgages have a term of five years or less, compared to the 30-year standard in the US
“We think market expectations that the Bank of Canada will not cut interest rates next year may come as a surprise,” Marion said.
(More stories from Reuters September foreign exchange survey:)
Reporting by Fergal Smith; Survey by Sujith Pai, Devayani Sathyan and Pranoy Krishna; Edited by Jan Harvey
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