By Fergal Smith
TORONTO (Reuters) - The Canadian dollar will strengthen over the coming year, recouping recent declines against a broadly stronger U.S. counterpart, supported by solid domestic economic prospects and rising interest rates, according to a Reuters poll of analysts.
A combination of a hawkish Federal Reserve and a more uncertain global economic outlook as Europe's energy crisis worsened has weighed on the loonie in recent weeks.
Still, its roughly 4% decline against the safe-haven U.S. dollar since the start of 2022 is much less than for all the other G10 currencies.
"If risk aversion starts to diminish we could see the Canadian currency start to pull back to levels that are more consistent with fundamentals," said Jay Zhao-Murray, market analyst at Monex Canada Inc.
"For the most part it seems like the Canadian economy is going to fare a little bit better than some of its G10 peers. That's why we have strength in the back half of our forecasts."
The median forecast in the poll was for Canada's currency to strengthen 1.2% to 1.30 per U.S. dollar, or 76.92 U.S. cents, in three months' time, compared to the August forecast of 1.28. It was then expected to climb to 1.25 in one year.
Strong commodity prices, along with a boom in demand as economies eased pandemic-related restrictions, have allowed Canada to weather an economic storm threatening to tip many of its fellow rich nations into recession. Oil is one of Canada's major exports.
In addition, Canada's inflation rate has showed signs of peaking. The Bank of Canada has been among the most aggressive of the major central bank in tightening monetary policy.
Money markets and economists polled by Reuters expect the BoC on Wednesday to hike its benchmark interest rate by three-quarters of a percentage point to a level of 3.25% and for rates to then peak between 3.75% and 4.00% next year.
"The higher interest rates in Canada attract capital inflows which could be supportive of the loonie," Zhao-Murray said.
Canada's soaring house prices will decline sharply next year, but still not enough to make them affordable as the BoC is set to continue raising interest rates and keep them higher for longer, a separate Reuters poll showed. [CA/HOMES]
(For other stories from the September Reuters foreign exchange poll:)
(Reporting by Fergal Smith; polling by Aditi Verma, Milounee Purohit and Susobhan Sarkar, Editing by William Maclean)