Canadian dollar forecasts turn more bullish as oil hits 7-year high

TORONTO –

Canada’s dollar will strengthen more than previously thought over the coming year as oil prices climb and investors bet the Bank of Canada will hike interest rates at a faster pace than the U.S. Federal Reserve, a Reuters poll showed.

The median forecast in the Reuters poll was for the Canadian dollar to gain around 2% to 1.25 per U.S. dollar, or 80 U.S. cents in three months, compared to 1.26 in last month’s forecast.

It was then expected to climb to 1.22 in a year’s time.

Oil is one of Canada’s major exports. Its price has climbed to nearly US$90 a barrel, the highest since October 2014, and some experts are expecting further gains.

“Our energy analyst in the Middle East has just raised quite notably his forecasts for crude oil for 2022,” said Derek Halpenny, head of research, global markets EMEA and international securities, MUFG Bank. “We see that as one of the factors helping lift CAD.”

Major oil producers blame surging prices on the failure of consuming nations to ensure adequate investment in fossil fuels as they shift to greener energy, while recent tensions between Russia and Western powers have added to concerns about tight supply.

The potential for the Bank of Canada to tighten monetary policy more than the Federal Reserve in 2022 could also support the loonie, Halpenny said.

Last week, Canada’s central bank left its benchmark interest rate on hold at a record low of 0.25% but said hikes would be needed to cool inflation. Money markets expect the first hike in March and six in total this year, which is one more than expected from the Fed.

Canada’s economy climbed to above pre-pandemic levels for the first time in November, while a preliminary estimate shows gross domestic product grew an annualized 6.3% in the fourth quarter, beating the BoC’s forecast of 5.8%.

The Canadian dollar was the only G10 currency to gain ground against the greenback in 2021, rising 0.8%.

Potential for further gains has not been lost on speculators. They have raised bullish bets on the currency to the highest level since July last year, data from the U.S. Commodity Futures Trading Commission shows.