January 4, 2013 / 2:28 PM / in 5 years

Canadian dollar seen hitting early bumps in 2013, ending year stronger: poll

TORONTO (Reuters) - The Canadian dollar is expected to strengthen against the greenback in 2013 given the two countries’ divergent interest rate paths, but will likely face some short-term headwinds as U.S. politicians squabble over spending cuts and debt limits.

A man holds the new Canadian 100 dollar bill made of polymer in Toronto November 14, 2011. REUTERS/Mark Blinch

The median forecast in the poll of 49 economists and foreign exchange strategists, released on Friday, sees the commodity-linked Canadian dollar trading at C$0.99 to the U.S. dollar, or $1.0101, in one month’s time.

It is seen changing hands at C$0.98 in three, six and 12 months. It traded at C$0.9920, or $1.0081 early on Friday and gained about 2.7 percent in 2012, according to Thomson Reuters data.

“All in all, the outlook for Canada is good this year and most of that lies on Fed policy juxtaposed against Bank of Canada policy,” said Camilla Sutton, chief currency strategist at Scotiabank, who sees a slightly more positive year for the currency than the median forecasts.

But she warned that more immediate risks, such as an impasse in U.S. budget talks that leads to a rating downgrade, could hammer the Canadian currency.

“We have a lot of near term dynamics that are making it a challenge,” she said.

Canada’s central bank has stuck to a hawkish line on rates, making it an outlier among major global economies that are mostly slashing rates or printing money to stimulate growth.

But while it has said since April that it plans to raise borrowing costs eventually, it has not yet acted on that statement, leading National Australia Bank’s Nick Parsons to deem the stance “all gong and no dinner.”

Still, rates in Canada will be at least static if not higher in 2013, which should make the currency relatively attractive, analysts said.

“Canada has no reason to talk its currency down and does not have a recent track record of doing that,” said Parsons, NAB’s head of markets strategy for Europe.

By contrast, he expects Australian policymakers to get more vocal about cutting rates.

The forecast modest gain “is not a bad performance. It does show the Canadian dollar hanging in there,” Parsons added.

He said 2013 could see the Canadian dollar strengthen to retest parity with its Australian counterpart, another currency whose fortunes are tied to global growth and demand for commodities.

Worries about European stagnation, slower growth in China and the continuing budgetary saga in the United States have tempered hopes for a brisk global recovery, which could in turn lower the appetite for the Canadian dollar as commodity prices simmer.

But with decent domestic growth, sound public finances and a well-respected and capitalized banking sector, Canada’s currency may also benefit from increasingly being seen as a solid place to park cash.

“The nervousness that we still have at least for the first half of the year about global prospects will maintain the safe haven status and value of the triple-A seal of approval that our government bonds have,” said Avery Shenfeld, chief economist at CIBC World Markets in a speech at the Empire Club on Thursday.

“I suspect that the result will be that the Canadian dollar, a year from now, is sitting pretty close to where it is today as those two forces roughly balance out.”

Polling by Bangalore polling unit; Additional reporting by Solarina Ho; Editing by Andre Grenon and Jeffrey Hodgson

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