January 7, 2015 / 3:28 PM / 3 years ago

Canadian dollar seen pressured by cheap oil, expected Fed hike: Reuters poll

3 Min Read

Bank of Canada Governor Stephen Poloz presents the new Canadian five dollar bill made of polymer that is entering circulation today, at the Canadian Space Agency in St. Hubert, Quebec November 7, 2013.Christinne Muschi

TORONTO (Reuters) - The Canadian dollar is expected to trade near a five-year low against its U.S. counterpart for much of this year, under pressure from a crash in crude oil prices and an impending U.S. interest rate hike, according to a Reuters poll.

Currency strategists polled by Reuters have slashed their forecasts from a month ago after a rocky start to 2015, with heavy selling that has already knocked down the loonie nearly 2 percent to its weakest since early 2009.

They now predict the Canadian dollar will trade at C$1.18 in 12 months, weaker than the December forecast of C$1.16. The median forecast is C$1.16 in three months and C$1.17 in six months, according to the 42 forecasters polled.

The currency fell about 9 percent last year in its worst performance since 2008, the year the global financial crisis began in earnest. It was trading at C$1.18 on Wednesday.

A plunge of more than 50 percent in oil prices in just six months is partly to blame, as is the prospect that the Bank of Canada will keep interest rates unchanged long after an expected move by the U.S. Federal Reserve this summer. [FED/R]

The U.S. economy grew at a 5 percent annualized rate in the third quarter, its quickest pace in 11 years, giving further support to the view the Fed is gearing up to hike rates for the first time since 2006.

But the outlook is very different for Canada.

"It is hard to see any near-term positives for the Canadian dollar when 25 percent of your exports are energy products and the prices are dropping in half," said Avery Shenfeld, chief economist at CIBC World Markets.

"In this kind of environment, even to get a rate hike in the fourth quarter in Canada, we are going to need to see a significant recovery in oil prices."

Most strategists see these basic interest rate differentials as the main thing holding back the Canadian dollar.

"This will weaken the Canadian dollar on a pretty consistent basis over the course of 2015," said Benjamin Reitzes, a foreign exchange strategist with BMO Capital Markets.

Additional reporting by Anu Bararia and polling by Sarmista Sen in Bengaluru; Editing by Jeffrey Hodgson, Ross Finley and Jeffrey Benkoe

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