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The Canadian Dollar is expected to undergo "more Weakness Before a Revival in 2024" according to economists at the Canadian Imperial Bank of Commerce (CIBC), one of Canada's largest lenders and investment banks.

In a monthly forecast update, CIBC says shaky real activity is likely to prevent the need for additional tightening from the Bank of Canada this year, which will disappoint market participants who are currently positioned for a further rate hike.

Central bank policy expectations remain a central driver of foreign exchange markets: currencies can expect support if their central bank is set to raise interest rates and indicate rates will be maintained at high levels for an extended period. However, those currencies belonging to central banks that are likely to lead the rate-cutting cycle can be expected to decline in value.

"Canada’s economy has remained on shaky ground in the third quarter, which will likely prevent any further tightening by the Bank of Canada," says Katherine Judge, an economist at CIBC.

She adds that signs of softening in the labour market, particularly job vacancies, portend to a cooling in inflation ahead.

CIBC notes markets are priced for another interest rate hike from the Bank of Canada, which implies disappointment if their base case for no further hikes is realised.

Furthermore, Judge says markets are not placing high enough odds on cuts transpiring next year, requiring "a recalibration" that will weaken the Canadian Dollar end 2023."

CAD weakness is nevertheless likely to be realised against the Dollar as CIBC notes the U.S. economy remains resilient and the Federal Reserve won't have to cut rates as far as markets have been expecting.

"A more resilient US economy means that the Fed now sees a shallower path for easing in the years ahead," says Bipan Rai, Head of North America FX research and strategy at CIBC. "We expect investors to add to USD longs as the Fed is likely to be less reactive to weaker data relative to other central banks."

On the other hand, the Bank of England and European Central Banks are considered to have completed their rate-hiking cycles and a combination of weak economic activity and softening labour markets can be expected to weigh on the European currencies in the near term.

The net result is a Pound to Canadian Dollar exchange rate forecast for 1.65 by year-end 2023 and 1.66 by the end of 2024. The pair is currently closer to 1.67. (Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.)

The Euro to Canadian Dollar exchange rate is forecast by CIBC to be at 1.43 by year-end 2023 - down from current levels at 1.44 - ahead of a return back to 1.44 by year-end 2024.

The Dollar to Canadian Dollar exchange rate is seen at 1.39 by year-end 2023 and 1.37 by end-2024, implying some upside from current levels at 1.36.