Posthaste: Fasten your seat belts, the Canadian dollar is in for a bumpy ride
As the countdown to central bank rate cuts continues, what’s in store for the Canadian dollar?
Economists say so far the currency has held up fairly well, as the market pulls back a bit on expectations for a Bank of Canada move and oil prices get support from OPEC+’s decision to extend production cuts. It was trading at 73.60 US cents this morning.
But that may be about to change.
Capital Economics predict that the loonie is in for a rough year, as the paths of the Bank of Canada and the Federal Reserve diverge and other headwinds threaten.
There are a few reasons for this.
Canada may have avoided a recession, but its growth is going to be weak this year, Capital predicts. Inflation has also come in cooler than expected, on track to average 2.8 per cent this quarter.
Compare that to the United States where employment growth remains strong and recent inflation readings “have surprised to the upside.”
With the economy weak and inflation cooling, Capital expects the Bank of Canada will cut its rate to 2.5 per cent by 2025 — more than investors anticipate in most developed economies.
Its forecast for the Federal Reserve, however, is closer to market expectations. Capital expects the Fed to stop cutting in 2025 once its rate reaches 3.25 to 3.5 per cent.
That would put the policy rate differential between Canada and the United States at its widest since the Great Financial Crisis.
Furthermore, with little risk of recession in the U.S. in the near term, there is a larger chance that the Fed could deliver even less easing than economists expect, said Ruben Gargallo Abargues, assistant economist with Capital.
All this would work against the Canadian dollar, but there’s more.
Capital’s commodities team expects that OPEC+ will
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