February 3, 2016 / 2:35 PM / in 2 years

Canadian dollar to resume losing streak in months ahead: Reuters poll

The new Canadian five and 10 dollar bills, made of polymer, are displayed with the previously released 20, 50 and 100 dollar notes following an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013. REUTERS/Chris Wattie

(Reuters) - The battered Canadian dollar is expected to weaken even more, tied to the ill fortunes of depressed oil prices and the prospect of another interest rate cut, a Reuters poll showed.

After plunging to its weakest in 13 years in mid-January, toC$1.4689 on Jan. 20, the Canadian dollar, known as the loonie, rebounded more than 5 percent as the central bank kept interest rates on hold and the price of oil, a major Canadian export, rebounded.

But there is little hope that a massive oil supply glut in world markets will be soaked up considering clear evidence of waning demand, particularly from China. That suggests there is more downward pressure on the loonie to come.

“Everything is taking cues from crude prices, and nothing more strongly so than the Canadian dollar,” said Adam Cole, head of G10 currency strategy at RBC Capital Markets.

The poll of 45 foreign exchange strategists forecast the currency to weaken to C$1.42 in a month from Tuesday’s close of C$1.4051, a downgrade from C$1.39 expected in January’s poll.

From there, the loonie will likely recover modestly to C$1.40 in six months and C$1.37 in a year versus C$1.37 and C$1.34 predicted in the previous survey. That is about 30 percent below C$1.067, where it was trading when oil prices plummeted.

Crude oil is down more than 70 percent since mid-2014.

The poll’s 12-month forecasts were in a particularly wide range, from a 7 percent drop to a gain of 11 percent. Saxo Bank, the most bearish on the Canadian dollar in the poll, expects C$1.55 in six months and C$1.50 in a year.

The other unknown is what the Bank of Canada will do with rates. It cut them twice last year in an attempt to offset the oil price shock that eventually pushed the economy into recession.

And while many in financial markets expected it to cut again, it left rates unchanged at 0.50 percent at its latest policy meeting on Jan. 20.

But with barely any economic growth, some economists expect the central bank to reduce rates further, perhaps as early as March.

That would keep the Bank of Canada on a very different path from the U.S. Federal Reserve, which raised rates for the first time in nearly a decade in December.

The deeper the drop in crude prices, the more likely it will be that U.S. and Canadian monetary policy diverges further, said RBC’s Cole.

Bearish bets on the Canadian dollar rose to their highest in five months last week, according Commodity Futures Trading Commission data.

However, Bank of Canada Governor Stephen Poloz has continued to pin hopes on an export-led recovery in Canada driven by a weaker Canadian dollar and stronger U.S. demand.

But that hasn’t happened yet.

“So far the story has been one of disappointments,” said Cole.

U.S. economic growth braked sharply in the fourth quarter, casting doubts not only on its ability to lift Canadian export growth, but also on whether the Fed will soon follow up on its December hike with another.

Hendrix Vachon, currency strategist at Desjardins Group, said it will be “trouble for the Canadian economy” if a boost to export growth doesn’t materialize, especially when the economy is reeling under the double-barrelled blow of weak domestic demand and collapsing investment in oil production.

But Vachon, who forecasts the dollar at C$1.37 in a year, expects a U.S.-led recovery in exports in the coming months and oil prices to pick up by the end of the year.

Polling by Shrutee Sarkar and Kailash Bathija; Editing by Ross Finley and Meredith Mazzilli

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