Canadian currency, economy seen weakening if Britain exits EU

Fri Jun 17, 2016 12:54pm EDT
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By Fergal Smith

TORONTO (Reuters) - Canada's currency will weaken and the chances its central bank cuts interest rates would jump if Britain votes next week to leave the European Union, strategists warn, noting the result could hit global growth and spell bad news for commodity-exporting countries.

Economists expect the direct trade impact on Canada's economy from a so-called Brexit to be modest, given that Britain accounts for just 3 percent of the goods Canada exports.

But the market volatility triggered by a "Leave" vote may cause a global slowdown and weaker prices for many of the commodities Canada sells abroad, they said.

"In the event of a vote to leave, we will see some more risk-averse movement," said Shaun Osborne, chief currency strategist at Scotiabank, who expects the Canadian dollar could quickly weaken to between C$1.33, or 75.19 U.S. cents, and C$1.35. It traded at C$1.2887, or 77.60 U.S. cents, on Friday.

Britons vote on June 23 on the future of their membership of the European Union, with one poll on Thursday showing 53 percent would vote to leave the bloc.

If markets become disorderly, commodity currencies including Canada will underperform, said Michael Goshko, corporate risk manager at Western Union Business Solutions. He sees the likelihood of another Bank of Canada interest rate cut increasing if the Brexit side wins.

The prospect of central bank easing would support shorter-term Canadian debt prices, said David Tulk, chief Canada macro strategist at TD Securities. But in a Brexit scenario, he sees longer-term Canadian bonds underperforming deeply liquid U.S. Treasuries, which tend to benefit most from flight-to-safety flows.

Canadian debt securities have already benefited from safe-haven demand by foreign investors, who are also chasing yield, noted Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.   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