According to a Reuters poll, the Canadian dollar (CAD) will grow over the course of the next year as key commodities user China relaxes COVID-19 restrictions and the Federal Reserve may have finished its interest rate hike campaign.
Since the beginning of 2022, the loonie has lost nearly 7% of its value against the US dollar (USD), almost all of which has occurred since mid-August.
The currency would strengthen by 1.1% to 1.35 per US dollar, or 74.07 US cents, in three months, according to the consensus prediction of 35 currency analysts polled from December 1 to 6. This is down from November’s expectation of 1.36.
Commenting on the latest development, Abbey Omodunbi, a senior economist at The PNC Financial Services Group, said:
“Our forecast for a weaker [US] dollar in 2023 against major currencies, as the Fed switches gears and telegraphs an end to its tightening cycle, and a better growth outlook in Canada should bolster the Canadian dollar.”
The third quarter saw annualized economic growth in Canada of 2.9%, which was significantly higher than both analysts’ and the Bank of Canada’s expectations.
In an effort to reduce inflation, the BoC has increased its benchmark interest rate by 350 basis points since March, bringing it to 3.75%, its highest level since 2008.
When the bank meets to set policy on Wednesday, the financial markets anticipate at least another quarter-percentage-point of tightening.
Canadian Dollar to Be Bolstered by Oil
Oil is one of the main commodities that Canada exports. Although they have decreased from this year’s peak levels, China’s efforts to loosen pandemic restrictions may boost the prospects for demand.
Purchasing power parity (PPP), or the exchange rate that equalizes the purchasing power of several currencies, is one indicator of fair value. The PPP of the USD-CAD is estimated by the IMF to be 1.25, which is over 8% higher than its present value.
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