The Canadian dollar outlook looks less bearish as China’s economy weakens

TORONTO, Sept 7 (Reuters) – Analysts have cut their expectations for the Canadian dollar as China’s economy weakens and the gap between the United States and Canada widens, but the currency is expected to remain strong in a year ahead. The survey showed.

The average forecast of about 40 foreign exchange analysts is for the loonie to strengthen 1.9% to 1.34, or 74.63 US cents, in the three months, from 1.32 in last month’s forecast.

It was expected to advance to 1.29 on the year, matching August’s forecast and a 5.8% gain.

„The loonie has lost some feathers in recent weeks,” said Stephen Marion, chief economist and strategist at the National Bank of Canada.

„Weak commodity prices due to interest rate differentials with the US and a slowing Chinese economy are keeping the CAD under control.”

China’s economic growth slows as policymakers try to fix property market slump. Canada is a major producer of commodities, so the loonie is sensitive to the global growth outlook.

The currency has weakened about 4% since its July peak, while the Canadian 2-year yield has fallen further than its US equivalent in recent weeks.

On Wednesday, the gap in favor of the U.S. note was 36.5 basis points, the largest since May 3, when the Bank of Canada left its key interest rate on hold at a 22-year high of 5% as the economy entered a period of weak growth.

Canada’s economy unexpectedly shrank at an annual rate of 0.2% in the second quarter, and growth was mostly flat in July, data showed Friday.

Canadian employment data for August, due on Friday, may provide further clues about the strength of domestic activity.

High borrowing costs are a major concern for Canadians, after they borrowed heavily to participate in a red-hot housing market during the pandemic and especially because of the short mortgage cycle.

Almost all Canadian mortgages have terms of five years or less, compared to the typical 30-year term in the United States.

„We believe market expectations of no rate cuts by the Bank of Canada next year will be a surprise,” Marion said.

(For other stories from the September Reuters Foreign Exchange Survey:)

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