Fergal Smith

TORONTO, (Reuters) – The Canadian Dollar is likely to rise as the world recovers from the COVID-19 Crisis. But gains may be limited by Federal Reserve interest rates hikes.

According to Reuters, the average forecast for the Canadian Dollar was that it would strengthen 1% to 1.26 USD per U.S. dollars (or 79.37 U.S.cs) in three months. That compares with 1.25 last month.

The forecast was that it would rise to 1.2350 within a year.

Simon Harvey from Monex Europe, Head FX analysis said: “Our 12-month-horizon expectation for Canadian dollar strength is based our expectation of better global growth conditions.”

Harvey said that growth will increase after the first quarter, “as variant risks subside,” Harvey explained.

Canada is a large producer of commodity, such as oil. Therefore, it tends to be more sensitive to changes in the world economy. The price of oil rose 27% in December.

Canadian provinces announced restrictions in the last few days to stop the spread Omicron coronavirus variant. These moves mirror those made in other countries.

Investors remain reassured about the potential global economic impacts of this variant, even though studies have shown that the likelihood of being hospitalized is less.

Also supportive of the loonie, the Bank of Canada https://www.reuters.com/markets/us/despite-omicron-bank-canada-likely-signal-earlier-rate-hikes-possible-2021-12-17 is likely to change its interest rate guidance this month so that it has the option to raise borrowing costs earlier than planned.

The money markets anticipate that Canada’s central banks will raise five times by 2022, and that Canada’s policy rate will reach 2% in the next few years.

This is higher than the 1.6% threshold for the U.S. Federal Reserve, but these expectations may shift.

Bipan Rai of CIBC Capital Markets, North America head for FX strategy, stated, “We think that the terminal U.S. rate is still going to be higher.”

“U.S. dollars should strengthen once we have more Fed hikes priced out further (the money market curvature).

With a 0.8% increase in value, the Canadian dollar was only G10 currency that gained ground over the greenback.

(Also see: January Reuters Foreign Exchange Poll Stories