(Reuters) - The Canadian dollar will fall over the coming months on expectations that the U.S. Federal Reserve will continue raising interest rates, possibly as soon as this month, while the Bank of Canada stays on hold until 2018, a Reuters poll predicted.
While the Canadian currency may gain a bit in the short term, the survey of more than 50 foreign exchange strategists taken over the past week showed it weakening to C$1.345 per U.S. dollar in three months from C$1.3325 at Wednesday’s close.
The widening gap between the two nations’ monetary policies has been highlighted in several Reuters polls and is intensifying after Fed policymakers have fanned bets of a near-term rate hike in recent days. [ECILT/US][CA/POLL]
Record U.S. stock-market highs following President Donald Trump’s address to Congress that still offered few details on stimulus plans sent the Canadian dollar to a five-week low against the greenback.
“We expect the rate differentials to widen out in the (U.S.) dollar’s favor as the Bank of Canada remains on hold this year,” said Scotiabank chief FX strategist Shaun Osborne.
Forecasters see the loonie trading around C$1.36 by year-end, the same estimate as in February’s poll. Wells Fargo, the top forecaster in Reuters FX polls in 2016, expects the currency to weaken slightly more than 4 percent over the coming year to C$1.39.
“The Canadian dollar is somewhat overvalued relative to U.S.-Canada rate differentials right now,” said Wells Fargo currency strategist Erik Nelson. “There is room for some adjustment to the downside.”
Liquidation of some long Canadian dollar positions could add to volatility.
Even though respondents expect the loonie to rise marginally in one month to C$1.325, the forecast range was wide, running from C$1.28 to C$1.42.
Traders had increased bullish bets on the loonie to the most since May, according to the latest Commodity Futures Trading Commission data and Reuters calculations published last week before the Fed ramped up its rate hike rhetoric.
The other wild card is the Trump administration’s policy approach to the U.S. dollar, which a majority of currency strategists in a similar poll said was not clear.
On the one hand, Trump has spoken of ditching his country’s two-decade-old strong dollar policy to attract more demand from abroad for U.S. products. On the other, he has pledged hefty fiscal reforms that could strengthen the greenback instead.
Concerns over his stance on world trade and dollar policy drove the U.S. currency to its worst start to a year in three decades. But the dollar index .DXY, which measures the greenback against a basket of six major peers, rallied on Wednesday to its highest intraday since Jan. 11 as traders bet on a near-term U.S. interest rate hike.
Trump’s proposal of a border adjustment tax could also hurt the loonie due to Canada’s heavy reliance on exports to the United States.
At a recent conference in Washington with Prime Minister Justin Trudeau, Trump allayed fears about how the U.S. trade policy might affect its northern neighbor, saying he will only “tweak” the existing trade arrangement with Canada.
But the border tax still remains a risk.
And although the price of oil, a key Canadian export, has doubled over the past year with major exporters reducing supply, a rise in U.S. shale output could cap further gains and keep the loonie subdued. [O/POLL]
Analysis by Sujith Pai; Polling by Vartika Sahu; Editing by Ross Finley and Lisa Von Ahn