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The minutes of the meeting revealed the cautious attitude of the Bank of Canada. Survey: USD/CAD will fall to 1.34 in the next year.

2024-02-08

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The Canadian dollar is expected to strengthen over the next year if the Federal Reserve cuts interest rates as expected, but gains may be capped as mortgage renewals take their toll on household spending and economic growth, a survey found. #2024Macro Outlook#

In the February 1-6 survey, the median forecast among 40 currency analysts was that the Canadian dollar would appreciate 0.7% in three months to reach 1.34 U.S. dollars to the Canadian dollar, or 74.63 U.S. cents, compared with 1 The forecast for the month was consistent. It is expected to rise to 1.30 in a year, also in line with last month's forecast.

The Canadian dollar is expected to strengthen as some analysts predict a broadly lower U.S. dollar.

Jayati Bharadwaj, global currency strategist at TD Securities in Canada, said, "We expect the dollar to weaken in 2024 as U.S. economic growth slows, converges with the rest of the world, and the Fed Start cutting interest rates." She added that markets may then focus on a boost to growth from a "global easing cycle."

Canada is a major producer of commodities, including oil, so its economy is likely to benefit from an improving global outlook. Still, analysts expect the pace of mortgage renewals to hinder the Canadian economy.

Canada’s mortgage cycle is particularly short — typical loan terms are five years or less, compared with 30 years in the U.S. — and many households are likely to renew at higher rates after borrowing heavily at extremely low rates during the pandemic.

Bharadwaj said upcoming mortgage renewals and the Canadian dollar's lower sensitivity to U.S. dollar moves than its other G10 peers could limit the currency's gains.

"We expect the Canadian dollar to appreciate in the overall USD forecast but is unlikely to be the outperformer in the G10," she said.

Bank of Canada wary of cutting rates too early as underlying inflation persists

Minutes of the meeting released on Wednesday showed that when Bank of Canada board members decided to keep overnight lending rates unchanged on January 24, they were concerned about cutting borrowing costs too early because of persistent inflation.

The minutes of the meeting stated that the Policy Development Council was "particularly concerned about the persistence of inflation and does not want to cut interest rates prematurely."

The Bank of Canada aims to keep inflation around 2% and has raised its overnight lending rate 10 times in 17 months, taking it to 5%, the highest level in 22 years, to control inflation.

The minutes said housing price inflation, including mortgage interest costs, rents and components related to house prices, remained the biggest factor causing inflation to exceed target.

"Members expressed concern that future housing price inflation will continue to keep overall inflation high," the minutes said.

The minutes of the meeting said the Board was concerned that if the housing market rebounded more than expected in the spring of 2024, housing price inflation could keep headline inflation above target even as other price pressures eased.

Canada's housing costs, which make up more than a quarter of its CPI basket, rose 6% year over year in December, even as headline inflation stood at 3.4%.

Bank of Canada Governor MacCallum told a news conference at the Council on Foreign Relations in Montreal on Tuesday that the bank expects modest increases in housing prices in 2024, which has been factored into its forecasts.

The minutes of the meeting showed that the Bank of Canada was also worried that wage growth and zero productivity growth might further increase inflationary pressures. "Members expected wage growth to gradually slow down," the minutes said.

The Bank of Canada also believes that restrictions on monetary policy may affect consumer spending and could lead to a significant contraction in economic activity, forcing the Bank of Canada to "cut interest rates earlier and faster than expected."

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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The minutes of the meeting revealed the cautious attitude of the Bank of Canada. Survey: USD/CAD will fall to 1.34 in the next year.

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