June 17, 2016 / 4:57 PM / 3 years ago

Canadian currency, economy seen weakening if Britain exits EU

TORONTO (Reuters) - Canada’s currency will weaken and the chances its central bank cuts interest rates would jump if Britain votes next week to leave the European Union, strategists warn, noting the result could hit global growth and spell bad news for commodity-exporting countries.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

Economists expect the direct trade impact on Canada’s economy from a so-called Brexit to be modest, given that Britain accounts for just 3 percent of the goods Canada exports.

But the market volatility triggered by a “Leave” vote may cause a global slowdown and weaker prices for many of the commodities Canada sells abroad, they said.

“In the event of a vote to leave, we will see some more risk-averse movement,” said Shaun Osborne, chief currency strategist at Scotiabank, who expects the Canadian dollar could quickly weaken to between C$1.33, or 75.19 U.S. cents, and C$1.35. It traded at C$1.2887, or 77.60 U.S. cents, on Friday.

Britons vote on June 23 on the future of their membership of the European Union, with one poll on Thursday showing 53 percent would vote to leave the bloc.

If markets become disorderly, commodity currencies including Canada will underperform, said Michael Goshko, corporate risk manager at Western Union Business Solutions. He sees the likelihood of another Bank of Canada interest rate cut increasing if the Brexit side wins.

The prospect of central bank easing would support shorter-term Canadian debt prices, said David Tulk, chief Canada macro strategist at TD Securities. But in a Brexit scenario, he sees longer-term Canadian bonds underperforming deeply liquid U.S. Treasuries, which tend to benefit most from flight-to-safety flows.

Canadian debt securities have already benefited from safe-haven demand by foreign investors, who are also chasing yield, noted Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

Foreign investors purchased $13.5 billion of Canadian debt securities in April, the highest such investment in a year.

Still, a tightening in monetary conditions provoked by Brexit would hurt Canada’s growth prospects, Chandler said, predicting credit spreads would widen, increasing borrowing costs for local companies.

Canada’s equity fund managers are also keeping a close watch on the vote. Many increased exposure to domestic stocks in recent months as the main index climbed more than 20 percent from a three-year low in January.

While Canada’s resource-linked market would be vulnerable to a commodity pullback, gold mining stocks may benefit from safe-haven demand for bullion.

“As of now, nothing is broken despite the recent volatility. But if and when it is, we will be as defensive as required,” said Diana Avigdor, head of trading at Barometer Capital Management.

Editing by Alan Crosby

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