May 10, 2018 / 1:53 PM / in 6 months

Canadian dollar seen rising as NAFTA clarity boosts BOC confidence

TORONTO (Reuters) - The Canadian dollar is expected to strengthen over the coming year as a clearer outlook for the NAFTA trade pact opens the door to more Bank of Canada interest rate hikes, a Reuters poll of currency strategists showed.

The loonie CAD= has weakened in recent weeks against a broadly stronger U.S. dollar .DXY despite the price of oil CLc1, one of Canada’s major exports, surging to its highest in more than three years.

Strategists said the loonie has been pressured by the Bank of Canada’s caution on raising interest rates too fast in the face of a number of uncertainties for the domestic economy, such as a cooling housing market and renegotiation of the North American Free Trade Agreement.

“There is a lot of focus on NAFTA and other political noise at the moment, that is dampening the Canadian dollar,” said Shaun Osborne, chief currency strategist at Scotiabank. “Once we get some clarity on that, hopefully in the next few weeks, I expect the Canadian dollar to strengthen.”

Ministers from Canada, the United States and Mexico have been pushing this week for a deal to rework the 24-year-old accord, seeking to resolve an impasse in key areas before elections in Mexico and the United States complicate the process.

Canada sends about 75 percent of its exports to the United States so its economy could benefit if a deal is reached.

The poll of more than 45 foreign exchange strategists predicted that the loonie will rise to C$1.26 to the greenback, or 79.20 U.S. cents, in three months, from around C$1.277 on Thursday.

The currency, which hit a nearly seven-week low on Tuesday at C$1.2998, is then expected to climb further to C$1.24 in a year.

“The Canadian dollar remains much weaker than levels that would typically be associated with current oil prices,” said Krishen Rangasamy, a senior economist at National Bank Financial.

Oil has been boosted this week by U.S. President Donald Trump’s decision to quit a nuclear deal with Iran. [O/R]

Rangasamy expects uncertainties related to NAFTA and the housing market to fade in coming months and for the Bank of Canada to turn its focus to rising inflation pressures.

Canada’s annual inflation rate strengthened to 2.3 percent in March, the second straight month it has exceeded the Bank of Canada’s 2.0 percent target.

The central bank has raised its benchmark interest rate, now at 1.25 percent, three times since July. Money markets, as well as economists polled by Reuters, expect the central bank to hike twice more this year. [CA/POLL]BOCWATCH

That is less than the three additional rate increases by December some investors are expecting from the U.S. Federal Reserve. But rate hikes from the Bank of Canada could have more impact on the market because the central bank started its tightening cycle less than a year ago, much more recently than the Fed.

“The Bank of Canada has further to go than the Fed,” said Eric Viloria, a currency strategist at Wells Fargo.

(Other stories from the global foreign exchange poll:)

Polling by Mumal Rathore and Anisha Sheth; Editing by David Gregorio

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