Canadian Dollar Anticipated to Strengthen in 2025 as Rate Cuts Stimulate Economy: Reuters Poll

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar is expected to continue its recovery against the U.S. dollar over the next year, driven by lower borrowing costs that are likely to boost economic growth in Canada and enhance investor appetite for risk, according to a recent Reuters poll.

Since hitting a nearly two-year low of 1.3946 per U.S. dollar, equivalent to 71.71 U.S. cents in August, the Canadian dollar has strengthened by 3.3%.

The median forecast from nearly 40 foreign exchange analysts in a poll conducted from September 30 to October 2 projects that the loonie will maintain its gains over the next three months, slightly edging down to 1.3514 but remaining stronger than the previous expectation of 1.3650 reported in September.

Looking ahead a year, analysts predict the currency will rise by 1.7% to 1.3275, up from the earlier forecast of 1.3333.

The Bank of Canada is anticipated to further cut its benchmark interest rate in the coming months after reducing it by 75 basis points since June to a current level of 4.25%. Meanwhile, the U.S. Federal Reserve initiated its own easing strategy in September.

Canada’s economy is particularly sensitive to changes in interest rates. It has a shorter mortgage cycle compared to many other major economies, and its household debt relative to net disposable income stands at 184% in 2023, the highest among the G7 nations, according to OECD data.

"Domestic rate cuts will start to noticeably stimulate the local economy, while Fed easing should provide a favorable environment for risk assets in general, which creates a positive outlook for the loonie in the upcoming year," stated Nick Rees, a senior FX market analyst at Monex Europe.

Given that Canada is a significant commodity producer, especially of oil, its currency often reacts to shifts in investor sentiment. The outcome of the upcoming U.S. election in November could introduce an unpredictable element.

Economists Avery Shenfeld and Katherine Judge from CIBC Capital Markets noted, "We anticipate a moderately stronger loonie in 2025, as the U.S. dollar may lose some of the strength it gained from being a carry currency." They referred to the interest income investors gain from purchasing U.S. dollars while selling lower-yielding currencies.

The economists also cautioned, "U.S. fiscal and trade policies could potentially change our outlook after the U.S. election."

At this moment, however, there is considerable uncertainty regarding the next president, the composition of Congress, and which campaign pledges might be implemented, making it difficult to incorporate these factors into any substantial forecasts.