Canadian dollar seen higher as BoC tightening cycle comes into view: Reuters poll

By Fergal Smith

TORONTO (Reuters) - Forecasts for the Canadian dollar were raised in the latest Reuters poll as analysts expect the Bank of Canada to begin interest rate hikes before the Federal Reserve, alongside a high rate of COVID-19 vaccinations, to support the domestic economy.

The median forecast of more than 30 strategists in an Aug. 2-4 Reuters poll was for the Canadian dollar to strengthen around 2.4% in three months to 1.2250 per U.S. dollar, or 81.63 U.S. cents.

The unit, nicknamed the loonie, was then expected to rise further to 1.21 in a year's time, compared with a forecast of 1.22 in July's poll.

"We look for the loonie to rise a bit over the coming year," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. "The BoC will likely be beginning to prep markets for its first rate hike at about this time next year, while the Fed will be trailing behind."

Canada's central bank last month cut its weekly net purchases of Canadian government bonds to a target of C$2 billion from C$3 billion and maintained guidance for the first rate hike to come as soon as the second half of 2022.

The Fed's latest guidance for liftoff is 2023.

The Canadian dollar has gained more than 1.5% this year, lagging only the British pound among G10 currencies. In June, the loonie notched a six-year high near 1.20.

Improvement in Canada's current account balance has added to the positive outlook for the loonie, with foreign exchange flows moving more in favor of the currency, Anderson said.

Canada posted its first quarterly current account surplus since 2008 at the start of the year as prices rose for some major exports, including oil.

Oil touched a near seven-year high around $77 a barrel in July but has since been pressured by a more uncertain outlook for demand as the Delta variant of the coronavirus spreads in some major economies, including the United States.

The variant has reached Canada but a high rate of inoculation could reduce the risk of wide-ranging economic restrictions. About 72% of Canada's population has received at least one dose of a vaccine and 60% has been fully vaccinated, a Reuters tally shows.

Canada is "a clear leader on the vaccine front," said Erik Nelson, a currency strategist at Wells Fargo (NYSE:WFC), adding this could raise Canada's growth prospects compared with the United States, boosting the Canadian dollar.

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(Reporting and polling by Fergal Smith; Editing by David Holmes)