Canada's trade finance bank predicts the country's dollar will strengthen against its U.S. counterpart over the next few years even as BOC rate cuts keep borrowing costs lower than the Federal Reserve's, with a bigger lift coming from exports to America.

Canada's dollar will climb from 74 U.S. cents this year (or CAD1.35) to 78 cents in 2025 and 81 cents in 2026 according to Export Development Canada's forecast released Wednesday from Ottawa. The Bank of Canada will reduce rates gradually in line with the Fed with gradual rate cuts as inflation improves, and borrowing costs will end the cycle around 3% in 2026 from today's 5%, the EDC predicts. (See: MNI: Tight BOC Policy No Longer Needed - CD Howe)

"While the domestic side of the economy is expected to remain soft, Canada’s economy will be supported by exports to the resilient U.S. economy," chief economist Stuart Bergman said in the report. "While auto exports may struggle due to retooling, exports of energy, agri-food, and other key products are likely to do well."

Canada is also in for something of a soft landing, the EDC forecast suggests, with GDP growth slowing from 1.1% last year to 0.9% this year and picking up to 1.8% in 2025. Many economists last year said the country would slip into a recession following the BOC's 10 rate hikes.