Key facts
- Analysts now expect the Canadian dollar to gain 1.3% to 1.40 per U.S. dollar in three months, a weaker forecast than last month.
- The loonie is projected to strengthen 4.3% to 1.36 per U.S. dollar in 12 months, compared to the previous forecast of 1.34.
- The Trump administration has started a decade-long clock to wind down the USMCA trade deal.
- Approximately 70% of Canada's exports go to the U.S., many of which have faced U.S. tariffs.
- Speculators have increased their bearish bets on the Canadian dollar to their highest level since December.
- Canada's 2-year yield is currently more than 140 basis points below the U.S. equivalent.
The Canadian dollar is expected to strengthen less than previously anticipated over the next year, according to a Reuters poll of foreign exchange analysts. This revised outlook is attributed to uncertainty surrounding negotiations to revise the U.S.-Mexico-Canada Agreement (USMCA), which is seen as a drag on the Canadian economy and a dampener on the Bank of Canada's prospects for interest rate hikes.
The median forecast from 39 analysts surveyed between June 26 and July 1 indicated the loonie would gain 1.3% to 1.40 per U.S. dollar in three months, a weaker projection than the 1.37 forecast in the previous month's survey. Looking out 12 months, the Canadian dollar was expected to strengthen 4.3% to 1.36 per U.S. dollar, compared to a prior forecast of 1.34.
The U.S. administration's decision not to extend the USMCA, known as CUSMA in Canada, has initiated a decade-long process to potentially wind down the trade deal as the U.S. seeks changes to reshore manufacturing and reduce trade deficits. Canada, which sends about 70% of its exports to the U.S., has already seen key sectors like steel, aluminum, autos, and lumber hit by U.S. tariffs. Recent quarterly GDP data indicated the Canadian economy was entering a technical recession.
Bradley Saunders, North America economist at Capital Economics, noted that the loonie has weakened against the U.S. dollar due to shifting rate expectations. He anticipates this trend to continue as USMCA uncertainty hinders Canadian growth and potential rate hikes, while sticky core inflation and solid U.S. GDP growth may prompt the Federal Reserve to reverse some earlier rate cuts. Speculators have raised their bearish bets on the Canadian dollar to their highest level since December. Last week, the currency reached a 14-month low, and Canada's 2-year yield fell over 140 basis points below its U.S. counterpart, marking the widest gap since May of the previous year.
The Bank of Canada has indicated limited evidence of broad-based inflation fueled by higher energy prices. Swap markets are now pricing in approximately 10 basis points of tightening from the central bank this year, a significant decrease from the roughly 60 basis points anticipated in May. Meanwhile, Federal Reserve Chairman Kevin Warsh affirmed the U.S. central bank's commitment to its 2% inflation target, suggesting no expectation of loose monetary policy.