April 3, 2013 / 5:08 PM / 4 years ago

C$ seen slowly firming in year ahead as domestic economy lags: Reuters poll

TORONTO (Reuters) - The Canadian dollar will likely strengthen at a slower pace against the greenback than previously expected, a Reuters poll showed on Wednesday, though hopes remain high that a U.S.-led global recovery will boost Canada’s currency later this year.

The median forecast in the poll of 52 economists and foreign exchange strategists saw the Canadian dollar trading at C$1.02 to the U.S. dollar in a month and at C$1.013 in three months.

The currency is expected to strengthen to C$1.002 in six months and reach equal value with the greenback a year from now.

The Canadian dollar traded at C$1.0141 versus the U.S. dollar, or 98.61 U.S. cents, early in the North American session on Wednesday, after touching its strongest level since February 20 on Tuesday.

“A lot of the good news is in the Canadian dollar here,” said Shaun Osborne, chief currency strategist at TD Securities, which has forecast near-term weakness for the currency, followed by gains early next year.

“Canada is lagging behind the improvements we’ve seen in the U.S. economy in the first quarter and if we see a stumbling in growth in the second quarter that won’t be good for Canada.”

Canadian manufacturing suffered a surprising contraction in March while the pace of global factory activity picked up, surveys showed this week. Economic growth bounced in January from a year-end slump, but not enough to match upbeat official forecasts.

“Overall we have a Canadian dollar that is biased for strength but has a very difficult time moving substantially away from parity,” said Camilla Sutton, chief currency strategist at Scotiabank, which sees the currency softening to C$1.04 in three months before firming to C$1.01 a year from now.

She said in coming months U.S. economic indicators were likely to keep outperforming Canadian numbers and that high levels of Canadian household debt would also weigh.

PLAYING CATCH UP

Sutton added that further strength in the United States - Canada’s biggest export destination - would likely help Canada’s domestic economy pick up later in the year, while a better price for Canadian crude and evidence of a soft landing for the housing market would also benefit the Canadian currency.

The discount paid for Canada’s heavy crude versus the U.S. benchmark has narrowed sharply, to around $15 from more than $40 in January.

“Weakening off in the domestic data is a significant concern for the FX market. But I suspect as we get into the second half that changes and we have a more upbeat outlook on the domestic side for Canada,” she said.

The latest forecasts were somewhat weaker than those made a month earlier, despite the currency having gained some 1.5 percent since then.

The range of forecasts on the loonie, as Canada’s currency is colloquially known after the water bird on its dollar coin, was particularly wide, with more than 22 Canadian cents separating the most bullish and bearish views for the year ahead.

The March 6 poll pegged the loonie at C$1.02 to the U.S. dollar one month out, at equal value after three months, C$0.99 in six months and back to parity after 12 months.

The renewed pessimism stems from a string of data releases on housing, manufacturing and other key indicators pointing to a lackluster start to 2013 for Canada that diverges from a decent, if still fragile, U.S. recovery.

“It would appear that our export sector is not picking up any sort of momentum,” TD’s Osborne said. “That suggests that the Canadian dollar is somewhat overvalued from a trade point of view.”

With additional writing by Jeffrey Hodgson; Editing by Nick Zieminski

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