C$ down for year but upbeat heading into 2012

Fri Dec 30, 2011 3:35pm EST
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By Claire Sibonney

TORONTO (Reuters) - The Canadian dollar rallied into the end of 2011, albeit in holiday-thinned volume, heralding what many analysts believe will be a better year for the economic growth-sensitive currency in 2012.

Canada was a mediocre performer among G10 currencies in 2011, down 2.2 percent after a roller-coaster second half of the year during which trade was driven by headline risk out of Europe. In 2010, the Canadian dollar had a 5.7 percent gain against the greenback.

The lackluster performance by the Canadian dollar in 2011 - as well as a slumping Canadian equity market - reflected slowing global economic growth, which spurred spikes in risk aversion and volatility in commodity prices.

"Once we get out of the specific near-term, high-risk environment, the outlook is fairly good for the Canadian dollar in the sense that it's increasingly difficult to turn towards Europe as an investment," said Camilla Sutton, chief currency strategist at Scotia Capital. "I think portfolio managers globally will be looking for alternatives, and Canada fares fairly well on that in the sense that we are a triple-A rated country with a bond market."

A stronger-than-expected U.S. economic outlook and U.S. oil prices holding in around $100 should also support Canada, especially with market volatility dropping off from autumn highs.

"The biggest risk is a sudden escalation in Europe, or the other big risk is just if we see a far bigger slowdown than we expect from China, which would be negative for the Canadian dollar," Sutton cautioned.

On Friday, Canada's commodity-linked currency was seen getting a lift from positive year-end flows from asset managers as well as from a rebound in the euro after Spain announced a slew of measures to control spending. <FRX/>

While analysts said the euro would continue to be under pressure next year as the region's debt crisis continues to flare, the Canadian dollar is expected to do better, although the ride will be bumpy. Forecasts have it sharply weaker by mid-year, but strengthening back towards U.S. dollar parity by the end of 2012.   Continued...