Forex
Canadian dollar seen up but gains restrained by mortgage resets
© Reuters. FILE PHOTO: Bank of Canada Governor Mark Carney holds the new Canadian 50 dollar bill, made of polymer, in front of the CCGS Amundsen, the Arctic research vessel depicted on the back of the new bill, in Quebec City, March 26, 2012. REUTERS/Mathieu Belange
By Fergal Smith
TORONTO (Reuters) – The Canadian dollar is set to strengthen over the coming year if the U.S. Federal Reserve cuts interest rates as expected, but its gains could be held in check as mortgage renewals weigh on household spending and economic growth, a Reuters poll found.
The median forecast of 40 foreign exchange analysts surveyed in the Feb. 1-6 poll was for the to strengthen 0.7% to 1.34 per U.S. dollar, or 74.63 U.S. cents, in three months, matching the forecast in January’s poll.
It was then predicted to advance to 1.30 in a year, also matching the previous month’s forecast.
The expected strengthening comes as some analysts forecast broad-based declines for the U.S. dollar.
The greenback is likely to weaken in 2024 as U.S. economic growth slows to a pace that is more in line with the rest of the world and the Fed starts cutting rates, said Jayati Bharadwaj, a global FX strategist at TD Securities, adding markets could then focus on the boost to growth from “global easing cycles.”
Canada is a major producer of commodities, including oil, so its economy could benefit from an improved global outlook. Still, analysts expect the pace of mortgage renewals to hold back its economy.
Canada’s mortgage cycle is particularly short – the typical loan term is 5 years or less, versus 30 in the United States – and many households are likely to renew at higher rates after borrowing heavily at rock-bottom levels during the pandemic.
Upcoming mortgage resets and the Canadian dollar’s lower sensitivity to moves in the greenback than some other Group of Ten (G10) peers could restrain gains for the currency, Bharadwaj said.
“We expect CAD to appreciate on our broad USD outlook but it is unlikely to be the G10 outperformer,” said Bharadwaj.
(For other stories from the February Reuters foreign exchange poll:) (This story has been refiled to remove quotation marks in the first clause, in paragraph 5)
Investing.com – The US dollar has been on a tear since its late-September 2024 lows, and UBS thinks this near-term strength is likely to persist in the first half of the new year, with room to overshoot.
At 06:15 ET (11:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.5% lower, but has gained almost 4% over the course of the last year.
Better incoming US data (nonfarm payrolls and purchasing managers’ index)—and with it, US yields moving higher—have provided broad dollar support, analysts at UBS said, in a note.
Economic news elsewhere has been rather mixed, with growth prospects for Europe staying highly subdued. Accelerating growth in China suggests that there is growth outside the US. But with US tariff risks looming large, stronger activity in China is unlikely to shift investor sentiment and stall the USD rally, in our view.
In the near term, there seem to be limited headwinds holding the USD back, the Swiss bank added.
“US exceptionalism has appeared to reassert itself, with US economic data likely to stay strong in the near term and risks to US inflation moving higher again. The latest growth and inflation dynamics have lifted US growth and inflation expectations, which could allow the Fed to stay on hold in 2025.”
At least in the short run markets are likely to think this way, while other key central banks are likely to cut rates further.
The potential for monetary policy divergence is a powerful driver, which leads to trending FX markets and the potential for overshooting exchange rates.
US tariffs are also looming large, weighing on sentiment. The concern on tariffs is that they will have inflationary consequences. Given inflation scarring is still fresh on investors’ minds, it is dominating market narratives.
“That said, we think that a policy rate of 4-4.5% in the US remains restrictive and is a headwind to economic growth and inflation. This is unlikely to change absent hard evidence that productivity is rising in the US, which may happen given developments in AI and associated investment,” the Swiss bank added.
It appears that the market-unfriendly parts of the new Trump agenda (e.g., tariffs, trade tensions, immigration) are easier to implement and more likely to happen before the market-friendly parts (e.g., tax cuts, deregulation).
“We think a negative impact on US growth is not priced at all in the forex market, which cannot be said for the rest of the world, particularly Europe,” UBS said.
“Hence, we still think that 2025 could be a story of two halves—strength in 1H, and partial or full reversal in 2H. The fact that the USD is trading at multi-decade highs in strongly overvalued territory and that investor positioning (like speculative accounts in the futures market) is elevated underpin this narrative.”
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