By Fergal Smith

TORONTO (Reuters) – Analysts have cut their bullish near-term forecasts for the Canadian dollar as China’s economy weakens and the gap between U.S. and Canadian bond yields grows, but still expect the currency to be stronger in a year, a Reuters poll showed.

The median forecast of nearly 40 foreign exchange analysts was for the loonie to strengthen 1.9% to 1.34 per U.S. dollar, or 74.63 U.S. cents, in three months, compared to 1.32 in last month’s forecast.

It was then expected to advance to 1.29 in a year, matching August’s forecast and a gain of 5.8%.

“The loonie has lost a few feathers in recent weeks,” said Stefane Marion, chief economist and strategist at National Bank of Canada.

“Widening interest rate differentials with the U.S. and weaker commodity prices due to a slowing Chinese economy are keeping the CAD in check.”

China’s economic growth is slowing as policymakers try to fix a property market downturn. Canada is a major producer of commodities, so the loonie tends to be sensitive to the global growth outlook.

The currency has weakened about 4% from its July peak, while the Canadian 2-year yield has fallen in recent weeks further below its U.S. equivalent.

On Wednesday, the gap was 36.5 basis points in favor of the U.S. note, its biggest since May 3, as the Bank of Canada left its key interest rate on hold at a 22-year high of 5%, noting the economy had entered a period of weaker growth.

Canada’s economy unexpectedly contracted in the second quarter at an annualized rate of 0.2%, and growth was most likely flat in July, data showed on Friday.

Canadian employment data for August, due on Friday, could offer further clues on the strength of domestic activity.

High borrowing costs are a major concern for Canadians after they borrowed heavily during the pandemic to participate in a red-hot housing market and due to a particularly short mortgage cycle.

Nearly all Canadian mortgages have a term of five years or less, compared with the 30-year term that is common in the U.S.

“We believe market expectations of no rate cuts by the Bank of Canada next year could be in for a surprise,” Marion said.

(For other stories from the September Reuters foreign exchange poll:)

(Reporting by Fergal Smith; Polling by Sujith Pai, Devayani Sathyan and Pranoy Krishna; Editing by Jan Harvey)

Brought to you by