By Fergal Smith
TORONTO (Reuters) - The Canadian dollar is expected to trade at stronger levels than previously thought over the coming months and year if the U.S. Federal Reserve pivots to cutting interest rates before the Bank of Canada, a Reuters poll found.
In 2023 the currency notched a 2.3% gain against its U.S. counterpart as the prospect of rate cuts bolstered investor sentiment in the final two months of the year.
It has since given back some of those gains and is set to weaken by an additional 0.4% in three months to 1.3400 per U.S. dollar, or 74.63 U.S. cents, according to the median forecast of 42 foreign exchange analysts surveyed in the Jan. 2-4 poll.
Still, that would leave the loonie at a stronger level than December's forecast of 1.3533 and the currency is then expected to advance to 1.3000 in a year, versus 1.3130 in last month's forecast.
"We think rate cuts are probably going to come a little bit earlier, maybe a little quicker in the U.S. relative to much of the rest of the world," said Shaun Osborne, chief currency strategist at Scotiabank. "Some compression in yield spreads should result in supporting the Canadian dollar."
Minutes from the Fed's December meeting did not provide direct clues about when rate cuts might begin but they reflected a growing sense inflation is under control and growing concern about the risks "overly restrictive" monetary policy may pose to the economy.
Money markets are betting the U.S. central bank will begin easing as soon as March and slash rates by roughly 150 basis points in total in 2024, while they are leaning toward April for the first rate cut by the BoC and see about 110 basis points of BoC easing this year.
The Canadian 2-year yield trades around 36 basis points below its U.S. equivalent but the gap has narrowed from 57 basis points in December.
Canada is a major producer of commodities, including oil, so the currency could also benefit if a possible move to Fed rate cuts helps support the U.S. and global economies.
"If we can avoid a (U.S.) recession, growth holding up should be some support at least for the high beta currencies, the commodity currencies and commodity prices," Osborne said.
(For other stories from the January Reuters foreign exchange poll:)