Canadian dollar to strengthen as BoC moves 'aggressively' on rate hikes

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar will gain ground over the coming year as high commodity prices bolster Canada's economic outlook and the Bank of Canada likely continues to raise interest rates aggressively, a Reuters poll showed.

The loonie is the only G10 currency to keep pace with the U.S. dollar, a magnet for safe-haven flows, in 2022.

The median forecast in the poll was for Canada's currency to strengthen 0.4% to 1.26 per U.S. dollar, or 79.37 U.S. cents, in three months' time, compared to 1.2568 in last month's forecast. It was then expected to climb to 1.23 in a year's time.

"I think there (are) pretty solid reasons to be constructive on the CAD in the medium term," said Shaun Osborne, chief currency strategist at Scotiabank.

"The Bank (of Canada) is taking a very proactive approach to policy making... Monetary policy is potentially going to move a little bit more quickly and maybe a bit more aggressively than the Fed (U.S. Federal Reserve) in the next six months."

The BoC opened the door to a more aggressive pace of tightening on Wednesday, saying it was prepared to act "more forcefully" if needed to tame inflation, even as it went ahead with a historic second consecutive half-percentage-point rate increase, lifting its benchmark rate to 1.50%.

Money markets expect the policy rate to reach 3% by December.

Some analysts expect Canada's economy to be particularly sensitive to higher interest rates after Canadians borrowed heavily during the pandemic to participate in a red-hot housing market.

The housing boom is expected to end next year, a Reuters poll of property experts found.

Still, Canada's gross domestic product grew at an annualized rate of 3.1% in the first quarter, helped by buoyant domestic demand. That compares favorably to a contraction in the United States.

"The (Canadian) economy itself is doing very well," Osborne said. "I think from a commodity, terms of trade, point of view, there is a good news story there to tell for Canada."

Terms of trade is the ratio of export prices to import prices. An improvement makes a country wealthier.

The price of oil, one of Canada's major exports, has soared more than 50% since the start of the year as Western sanctions on Russia have disrupted supplies.

(For other stories from the Reuters June foreign exchange poll:)

(Reporting by Fergal Smith; Polling by Susobhan Sarkar and Swathi Nair in Bengaluru; Editing by Jan Harvey)