The Canadian dollar is forecast to give back a portion of its recent advance against the U.S. dollar in the near term, yet could recommence a trend toward strength further out if geopolitical tensions associated with the Middle East conflict and concerns over U.S. tariffs diminish, according to a poll of foreign exchange analysts conducted May 1-6.
The median projection from 27 analysts places the Canadian dollar at 1.3667 per U.S. dollar in three months - a decline of 0.3% from current levels - which equates to 73.17 U.S. cents. That three-month outlook is slightly firmer than the 1.37 level these analysts projected in the previous month. Looking out 12 months, the median view in the poll has the loonie at 1.3433 per U.S. dollar, a 1.5% appreciation compared with today, and a modest improvement relative to last months 1.3500 forecast.
Market strategists in the poll pointed to the role of geopolitical risk premiums in recent price moves. "We have already seen a substantial repricing of risk, with geopolitical premiums going away, but ongoing uncertainty surrounding the U.S.-Iran conflict suggests the pair may remain range-bound in the near term," said Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets.
Oil prices are another significant factor underpinning the Canadian currency outlook. Oil - which has risen since the closure of the Strait of Hormuz - is a major export for Canada, and higher crude provides a terms-of-trade tailwind for the loonie. "Improving risk conditions, an erosion in (U.S.) dollar haven demand, and a terms-of-trade tailwind from persistently higher oil prices are all factors that favour USD-CAD downside," said Nick Rees, head of macro research at Monex Europe.
The Bank of Canada has signalled it could be compelled to respond with consecutive interest-rate hikes if elevated oil prices persist and feed through to higher inflation. Swap market pricing reflects investor expectations for two rate increases this year. By contrast, a majority of economists surveyed late last month expect borrowing costs to remain unchanged over the year.
Analysts also noted an additional potential source of near-term friction: the Canada-United States-Mexico Agreement, often called CUSMA or USMCA. The continental trade pact has insulated much of Canadas exports from U.S. tariffs, and it is due for review by a July 1 deadline, a negotiation that markets will likely watch for any surprises that could affect trade flows and currency sentiment.
Taking these factors together, several poll respondents said the loonie may be range-bound in the short run as geopolitical and trade risks are navigated, but could make gains against the dollar toward the back half of the year provided no significant surprises emerge in either the security situation in the Gulf or in trade negotiations.
Summary
The poll of 27 foreign exchange analysts projects a slight softening of the Canadian dollar against the U.S. dollar in three months to 1.3667, with a stronger 12-month outlook at 1.3433. Key influences include shifts in geopolitical risk linked to the U.S.-Iran conflict, elevated oil prices, Bank of Canada policy signalling, and the upcoming review of the CUSMA trade pact.