According to economists, there is a rise expected in the Canadian dollar later this year, as commodity-linked currencies are expected to see the global economic outlook become favorable for them.

Investors are also betting that most central banks will start cutting interest rates the next year.

The changes

However, there is expected to be little change in the loonie in the next three months and it will remain close to 1.34 per US dollar.

This is slightly stronger than the 1.35 that had been forecast for January. The currency had then been expected to strengthen in a year’s time to 1.30, which is a gain of about 3%.

Market analysts said that one of the biggest reasons behind the growing optimism is China, as a rise in demand will give the global economy a boost and this could also benefit pro-cyclical currencies.

It is likely that the demand for commodities will rise with the reopening of the second-largest economy in the world and these are produced abundantly in Canada.

This could potentially be handy in averting a recession, along as it does not drive up inflation, which could lead to more interest rate hikes.

China’s reopening is expected to benefit emerging market currencies as well as other commodity-linked currencies like the Australian dollar.

Monetary policy

Last month, the Bank of Canada became the first major central bank to hit a pause in its monetary tightening cycle.

The Canadian central bank said that it would now assess the impact of the interest rate hikes in bringing down inflation.

Market analysts said that central banks had begun to hit a pause, which would provide cyclical currencies, such as the loonie, a supportive environment, particularly in the second half of 2023.

The Bank of England (BoE), the European Central Bank (ECB) and the US Federal Reserve have all laid the foundation of pausing their respective tightening campaigns, but they are not done raising rates just yet.

Since the end of the hiking cycle appears to be in sight, money markets have priced in rate cuts by the BoC and Fed by the end of the year and more forceful easing to come next year.

Other details

Forex currency analysts said that the possibility of a reflationary dynamic in the future would likely have a positive impact on stocks later in the year.

They added that this was likely to give support to non-dollar currencies, which would also include the Canadian dollar.

This is due to the fact that where the equity markets are concerned, the loonie appears to have a strong positive correlation.

Hence, if they go up, it is likely that the Canadian dollar will also enjoy a boost, which could be good for the markets.

Nonetheless, all of this will depend on the inflation print, which is due in the next week for the US as well as Britain.

Inflation numbers for China are due on Friday and they will also give some clues about the economy’s recovery.