Canada dollar seen weaker before firming to U.S. dollar parity in one year

Tue Jul 3, 2012 2:59pm EDT
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By Jennifer Kwan and Claire Sibonney

TORONTO (Reuters) - Canada's currency is seen weakening over the next six months before firming to the one-for-one mark with the U.S. dollar, a Reuters poll showed, helped by the prospect of central bank easing abroad even as the Bank of Canada looks to tighten.

The currency, which touched a six-week high of C$1.0121 against its U.S. counterpart on Tuesday, has swung in a 3-cent range over the past month, sinking to a low of C$1.0446 in early June on fears about Europe's debt crisis.

The median forecast in the Reuters survey of more than 50 global foreign exchange strategists released on Tuesday showed the Canadian dollar slipping back to C$1.02 in one, three and six months from now. The median views were roughly in line with forecasts collected in the last poll in early June.

In a year, the currency is expected to strengthen to C$1.00 versus the U.S. dollar, helped by the broad market belief that faltering global growth will spur central banks outside of Canada to ease policy in a bid to stimulate their economies.

The U.S. Federal Reserve will likely end up delivering so called "QE3" - or quantitative easing - in the form of mortgage-backed securities purchases to prop up the economy, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

"If they do go ahead and provide relief on that front, that makes for a better sort of longer-run outlook in terms of the currency and maybe underpins some commodity prices as well," Chandler said.

The Canadian dollar typically strengthens when commodity prices rise and the global growth outlook improves because the country is a major exporter of natural resources.

Expectations of global central bank easing rose on Monday after the U.S. Institute for Supply Management's data for June showed the giant U.S. manufacturing sector contracted for the first time in nearly three years.   Continued...

Bank of Canada Governor Mark Carney holds the new Canadian 50 dollar bill, made of polymer, in front of the CCGS Amundsen, the Arctic research vessel depicted on the back of the new bill, in Quebec City, March 26, 2012. REUTERS/Mathieu Belanger