Canada’s dollar is expected to strengthen less than previously forecast over the next year as uncertainty surrounding the revision of the U.S.-Mexico-Canada Agreement (USMCA) weighs on the country’s economy, according to a Reuters poll of foreign exchange analysts. The survey projects the Canadian dollar to reach 1.40 per U.S. dollar in three months and 1.36 in 12 months, both weaker than forecasts made last month. Analysts say concerns over trade negotiations are reducing expectations of further interest rate hikes by the Bank of Canada.
The outlook follows the U.S. administration’s decision not to extend the current USMCA framework, triggering a decade-long process to renegotiate the trade agreement. Canada, which sends around 70% of its exports to the United States, has already been affected by U.S. tariffs on key sectors including steel, aluminum, automobiles and lumber. Recent economic data also indicates the Canadian economy has slipped into a technical recession, adding to pressure on the loonie.
Economists believe ongoing trade uncertainty will continue to restrain economic growth and limit the Bank of Canada’s scope for raising interest rates, while stronger U.S. growth and persistent inflation could keep the Federal Reserve on a tighter policy path. Market participants have increased bearish bets on the Canadian dollar, with the currency recently touching a 14-month low. Expectations for further monetary tightening by the Bank of Canada have also declined sharply compared with earlier projections this year.
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