Market News

(Bloomberg) -- Canada’s loonie will strengthen further against its US counterpart this year but its rise will be limited by the central bank’s interest-rate cuts, according to the currency’s most accurate forecaster in the second quarter.

Royce Mendes, managing director and head of macro strategy at Desjardins Securities, expects the Bank of Canada to cut rates three times this year while markets are pricing in less than one reduction.

As a result, he sees the loonie trading at 1.35 per US dollar by year end. It traded weaker Monday at 1.3725 per US dollar, after gaining 0.2% last week.

His out-of-consensus call on the three rate cuts is based on a view that a tariff-induced inflation flare-up has passed and the central bank will lower rates to aid the economy.

“I think that there is probably somewhat limited room for further strength this year,” said Mendes. “We think the market has moved too far in terms of pricing out the chance that the Bank of Canada returns to rate cuts this fall or winter.”

Analysts including Mendes expect policymakers to hold rates steady during the Wednesday meeting. Any further appreciation for the loonie that’s coming from increased hedging flows or dollar weakness could be limited by the monetary easing, Mendes added.

The loonie had been hit by President Donald Trump’s tariffs earlier this year but has recovered since then, with the greenback weakening against many currencies. While several forecasters predicted a move to a stronger loonie in the second quarter, Desjardins topped a Bloomberg ranking, which takes into account several criteria including timing of the forecast and margin of error.

“We said it’s going to reverse based on the hedging activity, on the potential for a less aggressive trade stance from the US with regards to Canada,” he said.

Even so, while all currencies in the Group of 10 have advanced, the loonie is still lagging the cohort year-to-date.

(Updates pricing in the third paragraph, adds details on ranking in the seventh.)