C$ to stabilize over coming year as rate hikes loom: Reuters poll

Thu Jun 1, 2017 9:39am EDT
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By Fergal Smith

TORONTO (Reuters) - Canada's dollar is expected to dip in the short term but stabilize in 12 months, a Reuters poll showed on Thursday, as a strengthening domestic economy encourages the Bank of Canada to prepare the market for interest rate hikes.

The loonie, which has been the weakest performer among G10 currencies this year, is expected to decline slightly in three months to C$1.36 to the U.S. dollar, or 73.53 U.S. cents, according to the median forecast in a survey of more than 50 foreign exchange strategists.

The currency has been buffeted this year by lower prices for oil, one of Canada's major exports, while investors have worried that the country's economy will suffer if a potential housing bubble pops or the North American Free Trade Agreement is revised.

But the poll respondents expect the currency to stabilize at C$1.36 in six months and recover to C$1.35 in a year, around where it was trading on Thursday.

Signals from the Bank of Canada that it is preparing to tighten monetary policy as the domestic economy strengthens will offset pressure from expected interest rate hikes from the U.S. Federal Reserve, strategists said.

Data on Wednesday showed Canada's gross domestic product grew at an annualized 3.7 percent pace in the first quarter following a solid expansion in the second half of 2016. The economy was also on solid footing as it ended the quarter, with growth rising by a better-than-expected 0.5 percent in March.

"There doesn't seem that much slack left (in the economy) to chew through," said CIBC Capital Markets economist Nick Exarhos. "The Bank of Canada won't be that far behind the Fed."

He expects the central bank to lift its policy rate to 1 percent from 0.5 percent in the first half of 2018.   Continued...

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch