July 2, 2015 / 1:40 PM / 2 years ago

Canadian dollar to weaken on outlooks for dim growth, higher U.S. rates: poll

The new Canadian five and 10 dollar bills, made of polymer, are displayed with the previously released 20, 50 and 100 dollar notes following an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013. REUTERS/Chris Wattie

BENGALURU/OTTAWA (Reuters) - The Canadian dollar is likely to fall further in the coming months, hit by both a weak domestic economic outlook and an anticipated rise in interest rates in the United States, a Reuters poll showed.

Oil prices are also expected to remain weak for the rest of the year amid a persisting global supply glut, and is likely to continue to weigh on the commodity-linked loonie. [O/POLL]

Still, analysts expect the currency will not fall as much as it did in March, when it hit its lowest levels since early 2009.

After a disappointing first quarter, the Canadian economy contracted further in April, raising speculation the Bank of Canada may cut interest rates again to spur growth, at a time when the U.S. Federal Reserve is poised to hike rates, possibly by September. [ECILT/US]

Such a divergence in monetary policy in the two key trading partners would likely send the loonie lower as investors favor the greenback.

The median in a poll of 49 foreign exchange strategists forecast the Canadian dollar CAD=D4 to trade at C$1.248 against the U.S. dollar, or 80.16 U.S. cents, a month from now. That would be stronger than Wednesday’s official close of C$1.2586.

Speculators are short the Canadian dollar by more than a net 17,000 contracts, up by more than 5,000 in the last week, as traders took out longs and added to short positions, according to CFTC and Thomson Reuters data.

Market analysts had expected a resurgent U.S. dollar to keep the loonie subdued but it is not just a U.S. dollar strength-driven story, said Andrew Grantham, senior economist at CIBC.

“After the weakness we saw in April GDP, that really kind of increases the odds the Bank of Canada could be cutting (rates) ... at a similar time the Federal Reserve may be doing the exact opposite,” said Grantham.

“The divergence in monetary policy in Canada and the U.S. will probably see the Canadian dollar weaken against the U.S. dollar.”

The loonie is seen weakening to C$1.27 in six months, before recovering somewhat to C$1.26 a year from now.

The forecasts were nearly in line with the last poll in June and would see the loonie avoid revisiting its low for the year of C$1.2833.

While markets still see about a 70 percent likelihood that the Bank of Canada will hold rates at 0.75 percent at its meeting in mid-July, economists said the disappointing economic data earlier this week raised the odds of a cut later this year.

The bank shocked markets with a rate cut in January in what it called “insurance” against the adverse economic impact of cheaper oil, a major export for Canada.

Analysts said the decline in growth in April appeared to run counter to the bank’s expectations that the impact of the oil-price slump would be concentrated in the early part of the year.

Polling by Khushboo Mittal and Krishna Eluri; Editing by Bernadette Baum

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