Loonie to gain as rate hikes cease: CIBC

With an end to rate hikes on the horizon, the U.S. dollar is set to weaken in the year ahead as other factors drive currency markets, says CIBC World Markets.

In a new report, CIBC economists said they’re anticipating a final 25-basis-point rate hike from the Bank of Canada this week, with two more 25-bps moves from the U.S. Federal Reserve Board this quarter.

Those rate moves are largely already priced in, which will likely leave the Canadian dollar range bound in the first quarter, it said.

For the rest of the year, though, the U.S. dollar will weaken against various currencies including the loonie, it said.

“We see a broad weakening trend in the U.S. dollar unfolding this year as attention turns to policy tightening in other advanced economies, and the greenback unwinds some of its safe-haven currency bid to come into better alignment with trade fundamentals,” the report said.

Additionally, it noted that the Fed will likely undershoot market expectations for its rate peak, which would also lend support to other major currencies.

“[T]he loonie could therefore gain a tailwind in the second half of 2023,” it said.

Looking ahead to 2024, both the Bank of Canada and the Fed “will likely be cutting interest rates towards neutral in lock step starting in Q1, making other factors, namely commodity prices and broad moves in the U.S. dollar against other currencies, the main driving forces behind an expected appreciation in the Canadian dollar,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.