July 3, 2012 / 7:05 PM / 5 years ago

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

4 Min Read

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.Mathieu Belanger

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.

Manufacturing has been one of the drivers of the U.S. economic recovery, which now appears to be losing momentum over fears about the euro zone's debt crisis, a slowdown in China and uncertainty over domestic fiscal policy.

u.s. Dollar Parity in a Year

The U.S. manufacturing picture contrasted with the latest data from Canada. The pace of growth in Canadian manufacturing activity climbed in June to its highest level since September, with continued gains in employment and an uptick in exports expected to fuel further growth this year.

Canada's stronger economic fundamentals have underpinned expectations that the Bank of Canada will raise interest rates before the U.S. Federal Reserve does, another factor that has supported the Canadian dollar.

Canada's main policy rate is now at 1 percent, while U.S. interest rates are near zero. A Reuters poll in late May showed the Bank of Canada's next move is expected to be a rate hike in early 2013.

The Bank of Canada early last month continued to signal it might have to raise interest rates but it softened its recent hawkish language a bit in reaction to a sharp deterioration in global financial conditions sparked by renewed fears about Europe.

Higher interest rates tend to help currencies strengthen by attracting international capital flows.

"On a relative basis, I think the fundamentals are strong, the fiscal position is comparatively robust, the central bank is doing a positive and proactive … job," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London.

"I think the underlying picture remains pretty robust."

The Canadian dollar has been a mid-range performer against the U.S. dollar, but has done better against other major currencies, said Matt Perrier, director of foreign exchange sales at BMO Capital Markets.

"During some of the heightened risk-trading environment Canada performed better on the crosses. Canada continued to perform well on a cross-related basis more than it did against the U.S. dollar. I think that will hold true going forward," he said.

Polling and analysis by Sarmista Sen and Snehasish Das; Editing by Jeffrey Hodgson and Peter Galloway

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