Canadian dollar on course for a long-term grind lower

Wed Sep 3, 2014 10:32am EDT
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By Leah Schnurr

TORONTO (Reuters) - A prolonged grind lower is likely in store for the Canadian dollar over the next year, with a sidelined central bank at home and an accelerating economic recovery south of the border expected to weigh on the currency, a Reuters poll found.

The loonie has had a turbulent year, marked by a sharp selloff starting in January. By early July, the currency had recovered, only to slip again through the rest of the summer.

And while the loonie managed to rally back again a bit last week, that is not expected to last. Analysts were more bearish on the loonie in the medium- and long-term.

"From here forward, we're pretty negative on the loonie," said Greg Moore, senior currency strategist at Royal Bank of Canada in Toronto. RBC sees the U.S. dollar at C$1.17 in a year, weaker than the poll's median forecast.

A stronger U.S. economic recovery and a Federal Reserve that is nearly done winding down its extraordinary stimulus measures and now focused on the timing of a first interest rate hike is seen leaving the loonie caught in the cross-hairs of broad U.S. dollar strength.

The Canadian dollar isn't likely to get any support from the Bank of Canada, which is expected to leave its benchmark interest rate unchanged until well into next year.

Concerns over low inflation and weaker-than-expected export and business investment growth are some of the reasons keeping rate hikes at bay in Canada, a Reuters poll showed last week.

Many commentators have also pointed to the risk of a severe correction in Canada's buoyant housing market when borrowing costs start to rise. Canadian households, on average, already hold debt worth over 1.5 times their income.   Continued...

Bank of Canada Governor Mark Carney holds the new Canadian 5 and 10 dollar bills, made of polymer, during an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013.     REUTERS/Chris Wattie