Fergal Smith

TORONTO (Reuters) – REUTERS POLL-CANADIAN DOLLAR TO STRENGTHEN SLIGHTLY TO 1.25/USD IN THREE MONTHS, MATCHING MARCH’S FORECAST

REUTERS POLL-CANADIAN DOLLAR SEEN UP 2% AT 1.23/USD IN ONE YEAR

Canada’s dollar is expected to strengthen as the Bank of Canada increases interest rates aggressively. However, gains could be limited due to the dependence of the housing market.

In the poll’s median, 0.4% was forecast for the Canadian currency to rise to 1.25 U.S. Dollars or 80 U.S. Cents within three months. This is the same forecast as last month. The forecast was for it to rise to 1.23 within a year.

Should Russia-Ukraine tensions ease over the next few months “there will be both a reason for a bit more of a risk-on trade, which would be beneficial to the Canadian dollar, but also some help from the Bank of Canada, in so far as it front-loads rate hikes,” said Royce Mendes, director & head of macro strategy at Desjardins.

The Canadian central bank will likely raise its overnight interest rates by half a point on April 13th, according to a majority polled by Reuters. They also raised their inflation forecasts this year. [ECILT/CA]

Since May 2000, the BoC has never raised rates this high. Last month, the central bank moved by the quarter-percentage-point increment it usually favors as it hiked for the first time since October 2018.

Due to the Ukraine crisis, demand for U.S. Dollars has been higher than usual. This could all change.

Stephen Brown, Senior Canada economist with Capital Economics said that there was still potential for an increase in the economy as investors take into account the positive effects of higher commodity prices on Canada’s economy.

Canada is a large producer of energy products. It helped drive record exports in February. According to economists, there will be more export growth in the future.

However, another important part of the economy has begun to lose momentum, the housing market.

It could also be a sign that there is a limit to how high the Bank of Canada can raise rates in this tightening cycle. This, however, may be compared with the Federal Reserve.

Brown stated that the recovery of Canada is dependent on house prices and residential investments more than in the United States. These are also more susceptible to rises in interest rates.

(For more stories about the April Reuters foreign currency poll, click here