Canadian dollar to rebound

The Canadian dollar will rally over the coming year if oil prices recover and the Bank of Canada continues lifting interest rates, according to a poll of currency strategists who have become less bullish on prospects for the currency. The poll of 40 strategists was taken before Wednesday's decision by the Bank of Canada to keep rates on hold as expected.
The central bank was seen as dovish by some market players, helping to send the loonie to a one-and-a-half-year low above 1.3400 to the greenback, or 74.63 US cents. Strategists predicted the commodity-linked currency would climb to 1.3050 to the greenback in three months. That is stronger than its close of 1.3352 on Wednesday, but weaker than the 1.2850 forecast in November's poll.
The loonie is then expected to climb to 1.2700 in a year. Last month's forecast was 1.2600. "Our view was that with the economy running at potential, inflation at the 2 percent target and unemployment at a multi-decade low, the Bank (of Canada) would continue along with their gradual approach to rate hikes," said George Davis, chief technical strategist at RBC Capital Markets.
"The recent USMCA trade agreement presented some upside risks for business investment and exports as capacity pressures continue to be felt." North American leaders signed the United States-Mexico-Canada Agreement on Friday, which could reduce uncertainty for Canada's economy. "Among the small open economies in G10, we see scope for FX appreciation beyond the forwards in most currencies except for Switzerland," noted FX strategists at Goldman Sachs.
"More specifically, we see room for CAD to appreciate against the USD on our forecast for a continuation of the Bank of Canada's hiking cycle, and the prospect for improvements in terms of trade next year." But some of the optimism over USMCA - the renegotiated North American Free Trade Agreement - has been offset by the lingering trade dispute between the United States and China and a sharp drop since October in the price of oil, one of Canada's major exports.
The impact of lower oil prices on Canada's economy has been worsened by the discount for Canadian heavy crude. Western Canadian Select (WCS) prices slumped in October to a discount of more than $52 a barrel below West Texas Intermediate, according to Shorcan Energy Brokers, due to transportation constraints and a storage glut. The discount has recovered to about $24 this week, after the premier of Alberta, the largest producer of oil in Canada, said on Sunday that the province would mandate temporary production cuts.