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Canadian Dollar Forecasts Become Less Optimistic As Economy Stumbles | The mighty 790 KFGO

By Fergal Smith

TORONTO (Reuters) – According to analysts weighing the impact of a surprising economic slowdown and signs of a cooler real estate market on the Bank of Canada’s political outlook, there is less upside for the Canadian dollar in the coming year, a Reuters poll showed.

With around 68% of the population fully vaccinated against COVID-19, Canada’s economy could be better positioned than some to handle a fourth wave of the virus.

Still, the economy surprisingly contracted in the second quarter when the lockdowns were in place and likely had far less momentum than expected at the beginning of summer, data showed Tuesday.

The Bank of Canada was expecting 2% growth in the second quarter, so the data may prompt them to increase their estimate of the economy’s spare capacity.

This is vital as the BoC has pledged to hold rates on hold until the doldrums are absorbed, which the central bank’s latest forecast would happen in the second half of 2022.

The data “puts a bit of a question mark over how quickly the Bank of Canada will raise rates in the future,” said Shaun Osborne, chief currency strategist at Scotiabank.

“It increases the risk that the Bank of Canada may be a little more cautious than we currently expect, at least on the messaging front.”

The BoC will make an interest rate decision next Wednesday, but an update of its economic forecast is not expected until October.

Meanwhile, early Canadian elections have been scheduled for September 20, but analysts see little difference between the major parties in fiscal and economic policy and doubt that this will have a lasting impact on the currency.

The median forecast of 36 strategists, surveyed from August 30th to September. 2 was that the Canadian dollar was up 1.6% in three months to 1.2350 per dollar, or 80.97 cents, compared to 1.2250 in last month’s survey.

A further increase to 1.22 was expected in a year. In August the forecast was 1.21.

The currency has gained 1.4% since the beginning of the year, the best performance among the G10 currencies, supported by higher commodity prices. Canada is a major producer of raw materials, including oil.

But oil has retreated from a high in July, with the outlook for demand becoming more uncertain and OPEC increasing production.

A combination of increased oil supply and declining housing investment could weigh on the Canadian dollar for the next year, said Stephen Brown, chief economist for Canada at Capital Economics.

Housing investment boomed during the pandemic, but the market has cooled from its March peak, while a recent Reuters poll showed that real estate market analysts expect prices to boil over the next year.[CA/HOMES]

The Bank of Canada “will not be as keen to hike rates” if the slowdown in real estate activity continues, Brown said.

(For other stories from Reuters forex polls 🙂

(Reporting by Fergal Smith; survey by Susobhan Sarkar and Mumal Rathore)

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