Canadian Dollar Forecast Profile Lowered at Royal Bank of Canada

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Royal Bank of Canada says it has once again lowered its forecast profile for the Canadian Dollar.

In a monthly currency research briefing, analysts at RBC say they have again lowered their longer-term profile of the Canadian Dollar to reflect an increasingly divergent path for interest rate policy between Canada and the United States.

The Canadian Dollar is also expected to lose ground against the Euro over the coming months while holding a steady line against the Pound.

For the currency markets, the scale of central bank interest rate cuts that are incoming will determine direction. "Our CA economists still see the BoC delivering four consecutive cuts this year and another -100bps next year," says Daria Parkhomenko, an analyst at RBC.

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Economists see the first Bank of Canada rate cut in June but the Federal Reserve will move much later in December.

This allows the interest rate policy gap between Canada and the U.S. to widen from the current +38bps to +113bps by year-end and +163bps by end-2025.

"We have raised our longer-term profile for USD/CAD again. Although our broader USD view is unchanged, our prior forecasts did not sufficiently account for the USCA policy divergence story," says Parkhomenko.

The Canadian Dollar is one of the underperformers of the G10 currency space of the past month owing to the steady rise in expectations for the Bank of Canada to cut interest rates in June following a run of softer-than-expected data prints.

Even last Friday's consensus-beating employment report was unable to boost CAD as it was revealed the economy is primarily creating part-time jobs.

In the near term, the May 21 release of Canadian inflation data will be crucial in firming bets for a June cut. "A BoC June rate cut is not fully priced and that may serve as a small headwind to CAD," says Parkhomenko.

The analyst says that if the inflation data beat expectations, the Bank of Canada might defer the start date to July.

However, the start date won't radically alter the quantum of cuts that are lined up, according to RBC. "The Canadian macro story relative to that of the US supports the BoC delivering a more aggressive rate cutting cycle than the Fed."

The U.S. Dollar to Canadian Dollar exchange rate is now forecast to rise to 1.37 by the end of June, 1.3850 by the end of September and 1.40 by year-end. It is tipped to peak at 1.42 by mid-year 2025.

The Euro to Canadian Dollar exchange rate forecast profile sees 1.45, 1.45, 1.50 and 1.53 at these respective points in time.

The Pound to Canadian Dollar exchange rate profile is 1.71, 1.69, 1.72 and 1.72. We have reflected recently that GBP/CAD is proving a relative stable exchange rate on account of similar expectations for the shape of the Bank of England and Bank of Canada interest rate cutting cycle.