Canadian dollar to weaken slightly as lower oil, sluggish growth weigh

Wed Aug 3, 2016 3:21pm EDT
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By Fergal Smith

(Reuters) - The Canadian dollar is expected to weaken slightly against the U.S. dollar over the coming months, a Reuters poll found, with a sluggish domestic economy and lower oil prices seen weighing on the commodity-linked currency.

The poll of more than 50 foreign exchange strategists showed the currency will weaken to C$1.3200 in three months, down almost 1 percent from Tuesday's close of C$1.3102. That matches the 3-month forecast from last month's poll.

The currency has weakened nearly 5 percent since May 3 when it reached a 10-month high of C$1.2461 against its U.S. counterpart.

"We do see oil prices coming under continued pressure throughout Q3 so we think that is going to weigh on the Canadian dollar," said Ian Gordon, FX strategist at Bank of America Merrill Lynch. Canada is a major oil exporter.

"A lot of the shock from the oil price decline that we saw from 2014 through to 2015 hasn't fully been felt yet ... the (Canadian) economy is going to continue to struggle particularly against a backdrop of a weakened export sector," he added.

Crude oil has tumbled more than 20 percent from its recent peak in June, dipping below $40 a barrel on Tuesday. It traded above $100 a barrel in mid-2014.

George Davis, chief technical strategist at RBC Capital Markets, also expects soft exports and lower oil prices to weigh on the Canadian dollar, as well as "fallout from the Alberta wildfires" in May and June.

The Bank of Canada has said the shutdown of oil sands production facilities and the evacuation of residents during the wildfires cut about 1.1 percentage points from annualized GDP in the second quarter.   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