TORONTO, May 3 (Reuters) - The Canadian dollar is set to strengthen less than previously expected over the coming year as the Bank of Canada makes progress on taming inflation and will likely begin cutting interest rates ahead of the Federal Reserve, a Reuters poll found.
According to the median forecast of nearly 40 foreign exchange analysts in the April 29-May 2 poll, the loonie will strengthen 0.7% to 1.36 per U.S. dollar, or 73.53 U.S. cents, in three months, compared to 1.34 in last month's poll.
It was then predicted to advance to 1.32 in a year, versus 1.31 expected previously.
"In the near term, I think there are going to be some headwinds," said Bipan Rai, global head of FX strategy at CIBC Capital Markets. "That's primarily a story about Canada potentially getting closer to rate cuts relative to the Federal Reserve."
The BoC is getting closer to lowering its benchmark interest rate from 5%, its highest level in more than two decades, Governor Tiff Macklem said this week, adding "the data since January have increased our confidence inflation will continue to come down gradually even as economic activity strengthens."
Inflation was 2.9% in March, higher than the central bank's 2% target.
Money markets see a roughly 60% chance the BoC will lower its benchmark interest rate at the next policy meeting on June 5 and expect around 60 basis points (bps) of easing in total from the central bank by the end of 2024, compared to 38 bps from the Fed.
"The Bank of Canada has made more progress on its inflation mandate than the Fed has at this point ... It's also clear (which central bank eases first) if you look at the relative performance of the economy," Rai said.
The OECD projects Canada's economy will grow 1% this year, much less than the 2.6% growth rate it forecasts for the United States.
Canada's economy is particularly sensitive to higher borrowing costs due to elevated household debt and a short mortgage cycle, analysts say. The typical loan term is five years or less in Canada, versus 30 in the United States.
(For other stories from the May Reuters foreign exchange poll:)
Reporting by Fergal Smith; Polling by Anitta Sunil, Susobhan Sarkar and Rahul Trivedi; Editing by Kim Coghill
