February 6, 2013 / 3:33 PM / in 5 years

C$ seen strengthening in 2013, helped by U.S. recovery : Reuters poll

TORONTO (Reuters) - The Canadian dollar is expected to strengthen over the course of 2013, a Reuters poll showed on Wednesday, with forecasters looking past recent dovish central bank comments and focusing on the positive impact of an improving U.S. economy.

The median forecast in the poll of 51 economists and foreign exchange strategists saw the commodity-linked Canadian dollar trading at C$0.99 to the U.S. dollar, or $1.0101, in one and three months.

It is expected to change hands at C$0.98 in six and 12 months. The forecasts were similar to a month-earlier poll.

The currency traded at C$0.9971 early on Wednesday, after recovering from a 2013 low of C$1.0101 late last month.

Analysts said the Canadian dollar should benefit from slow and steady economic recovery in the United States, Canada’s main trading partner, while relative monetary policy outlooks globally also favor the currency.

“One of the main things about Canada is that it has a very positive gearing to the U.S. and that is right now the region where we see the biggest growth momentum,” said Alvise Marino, a foreign exchange strategist at Credit Suisse in New York, which sees Canada’s dollar appreciating to C$0.95 a year from now.

The U.S. economy has slowly recovered from the financial crisis as its housing market finds its feet, with the U.S. Federal Reserve promising to keep buying debt with newly created money until unemployment levels fall significantly.

The Canadian dollar, which had traded at a higher value than the greenback since November, stumbled below parity last month after Canada’s central bank surprised investors by saying an interest rate increase is less imminent because of sluggish growth and tame inflation.

HIGHER RATES SEEN IN 2014

But unlike other Group of Seven central banks, the Bank of Canada still has a bias to tighten policy, something analysts said boosts the attractiveness of the country’s currency.

The prospect of tighter monetary often strengthens a currency because higher interest rates can help attract global capital flows.

“On a relative basis the Bank of Canada is still somewhat hawkish, and its policies aren’t currency negative the way the U.S. Fed’s quantitative easing is,” said Camilla Sutton, chief currency strategist at Scotiabank, referring to the Fed’s bond-buying program.

She added that the Canadian dollar should benefit from a narrowing of the spread between the price of oil produced in Canada and the global benchmark, which has hurt the profitability of Canada’s major energy producers.

Housing, a recent cause for concern at the Bank of Canada and a major contributor to economic growth, is also likely to be of less concern this year as prices moderate but don’t collapse, she said.

“A modest cooling is actually a positive for the Canadian backdrop,” Sutton said. “The worst thing would have been ongoing acceleration of housing prices into a bubble and eventually the popping of the bubble.”

Credit Suisse’s Marino said the Canadian dollar has a natural home between U.S.-dollar parity and C$0.95 to the dollar that will likely hold throughout 2013.

He doesn’t think the Bank of Canada will raise borrowing costs anytime soon, pointing to the risk that housing demand then plummets.

Most of Canada’s primary dealers expect rates to be held steady through 2013, with a first hike early in 2014.

“Unless the central bank is interested in engineering a sharp slowdown in housing, which we don’t think is the case, we don’t see much incentive for the central bank to move from where it is,” Marino said. (Polling by Bangalore polling unit; Editing by Jeffrey Hodgson)

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