Canadian Dollar Forecast to Decline by Desjardins Bank
- Written by: Gary Howes
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Quebec based Desjardins Bank are forecasting a steady decline in the value of the Canadian Dollar through the remainder of 2022.
In a mid-year assessment of the currency market Desjardins' economists say the global economic outlook will remain challenging over coming months which will naturally work against the Canadian currency, meanwhile rising Bank of Canada interest rates pose headwinds to indebted Canadian households.
"Fears of a worldwide recession are affecting the Canadian dollar, which isn’t the most sought after currency in uncertain times," says Jimmy Jean, Chief Economist and Strategist at Desjardins Bank in Montreal.
Desjardins says in their briefing note "markets are still very hectic" and the appetite for risk remains weak across the board, despite occasional instances of renewed optimism.
The Bank of Canada is meanwhile expected by investors to raise interest rates by nearly 200 basis points over the remainder of the year as policy makers address rising inflation and try to keep pace with the Federal Reserve.
"Key interest rate hike expectations are still high in Canada, but not enough to boost the loonie's value. In fact, rising interest rates accentuate the problem of high household debt and increase the risk of a significant correction to the residential market," says Jean.
Heading into the second half of the year the Canadian Dollar remains the second-best performing major currency of 2022, coming in behind the outperforming U.S. Dollar.
Gains were realised amidst a combination of strong post-Covid economic growth, elevated oil prices and a strong major trading partner south of the border.
Nevertheless, "the Canadian dollar should depreciate in the coming quarters," says Jean. "That forecast is based on further price declines in commodities, plus a slowdown of the Canadian economy and a correction of residential real estate prices of about 15%."
As a result of slowing economic activity Desjardins expects the Bank of Canada may have to stop its monetary tightening more quickly in the fall.
The Pound to Canadian Dollar exchange rate is forecast by Desjardins to be at 1.5714 by the end of the third quarter and 1.5867 by the end of the year. It is seen back at 1.6081 by the end of the first quarter of 2023, the spot rate is presently quoted at 1.5639. (Set your FX rate alert here).
The U.S. Dollar to Canadian Dollar exchange rate is forecast at 1.2987 by the end of the third quarter, 1.3333 by the end of the year and 1.3514 by the end of the first quarter 2023. Spot is currently at 1.29.
The Euro to Canadian Dollar exchange rate is forecast at 1.3506 by the end of the third quarter, 1.3733 by the end of the year and 1.3784 by the end of the first quarter of 2023. Spot is currently at 1.3422.
