Canadian Dollar Forecast and Mortgage Renewals Impact
Canadian Dollar Strength
The Canadian dollar is expected to strengthen over the next year, particularly if the U.S. Federal Reserve cuts interest rates as anticipated. However, the gains of the Canadian dollar are likely to be limited due to the impact of mortgage renewals on household spending and economic growth. This insight was derived from a recent Reuters poll conducted among 40 foreign exchange analysts in early February.
Projected Strengthening of Canadian Dollar
The median forecast from the analysts indicated that the Canadian dollar is set to strengthen by 0.7% to 1.34 per U.S. dollar, or 74.63 U.S. cents, over the next three months. This projection aligns with the forecast made in the previous month’s poll. Additionally, the Canadian dollar is anticipated to advance to 1.30 in the next year, mirroring the previous forecast as well.
Factors Influencing Currency Movement
The anticipated strengthening of the Canadian dollar coincides with the expectations of a general decline in the U.S. dollar. This trend is predicted to emerge as the U.S. economy slows down and the Federal Reserve initiates rate cuts. Jayati Bharadwaj, a global FX strategist at TD Securities, emphasized that the focus will shift to the global easing cycles and their impact on growth in the coming years.
Impact of Mortgage Renewals on Canadian Economy
It is noteworthy that Canada’s mortgage cycle is relatively short, with the typical loan term being 5 years or less, in contrast to the 30-year term prevalent in the United States. This unique aspect of the Canadian mortgage market is expected to pose challenges as many households are poised to renew their mortgages at higher rates after borrowing significantly during the pandemic. This situation is projected to restrain the Canadian dollar’s potential gains, as highlighted by Bharadwaj.
It is anticipated that even with the broader outlook for the U.S. dollar, the Canadian dollar is unlikely to outperform other G10 currencies, according to Bharadwaj’s analysis.