Canadian dollar set to weaken again after recent rally: Reuters Poll

Wed May 4, 2016 9:23am EDT
 
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By Anu Bararia

(Reuters) - The Canadian dollar, which recently hit a 10-month high, is expected to weaken again in the coming months if the U.S. Federal Reserve hikes interest rates as forecast in June and oil prices rally no further, a Reuters poll found.

The currency, nicknamed the loonie, has surged 13 percent from a 12-year low of C$1.4689 in January, helped by a partial rebound in oil prices, the Canadian government's recent fiscal stimulus plan and an unexpectedly strong start to the year for the economy.

Still, the poll of over 40 analysts showed the loonie will weaken to C$1.28 in a month, down 0.6 percent from Tuesday's close of C$1.2719, but not as much as was predicted last month.

It is then expected to fall further to C$1.30 in a year versus C$1.31 predicted in April. Forecasts ranged from a drop of 18 percent to a gain of 6 percent in 12 months.

"The Canadian dollar really is weakening on the basis of a generalized rebound in the U.S. dollar based on Fed tightening," said Shaun Osborne, chief currency strategist at Scotiabank.

After raising rates for the first time in nearly a decade in December, the Fed is expected to hike rates twice this year, according to economists polled by Reuters. Markets are betting on only one hike, and not until December. [ECILT/US]

In contrast, the Bank of Canada is likely to hold policy steady until the third quarter of 2017. [CA/POLL]

While that could take some of the shine off the loonie, any widening of the tiny gap between U.S. and Canadian policy rates is unlikely to do much to the currency as the Fed remains largely cautious about further policy normalization, said analysts.   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