September 1, 2016 / 1:58 PM / a year ago

Poll: Canadian dollar to hold its ground as economy rebounds

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

(Reuters) - The Canadian dollar is set to broadly hold its ground on expectations of an economic bounce-back in the current quarter, while being restrained by the prospect of higher U.S. interest rates and a shaky outlook for crude oil, a Reuters poll found.

Canada's economy shrank in the second quarter at its fastest pace in seven years on poor exports, including a disruption in oil production, a key export, caused by wildfires in northern Alberta. The dollar recently hit a three-week low of C$1.3134.

Growth was, however, upbeat in June alone and supported economists' predictions of a rebound by the end of this month driven by a stronger U.S. economy, accommodative monetary policy, and the government's fiscal stimulus plans.

On the whole, the Canadian dollar is not expected to do much over the forecast horizon.

The loonie is forecast to rise to C$1.301 in a month, up 0.7 percent from Wednesday's close of C$1.3104, the poll of over 50 foreign exchange strategists showed. The median is an upgrade from C$1.313 expected in August's poll.

It is then expected to weaken to C$1.310 in three months versus C$1.320 estimated a month ago, before rising to C$1.300 in a year. The three-month forecast range, from a 7 percent to a gain of 4 percent, hasn't changed much from the last month.

"There is a risk between now and then that we see the U.S. dollar do a little bit better ... and even overshoot our forecast, particularly if the Fed does get into a lift-off mode this year," said Shaun Osborne, chief FX strategist at Scotiabank.

"The rate differential has become more relevant over the last two-to-three weeks."

Speaking in Jackson Hole, Wyoming, Federal Reserve Chair Janet Yellen said the case for hiking U.S. interest rates has strengthened. In contrast, the Bank of Canada is expected to stay on the sidelines through the end of next year. [CA/POLL]

"We are waiting for the fiscal stimulus to come in the second half of the year and that is going to do the bulk of the work in terms of supporting the economy, which means that the Bank of Canada can very much stay on the sidelines," said Andrew Grantham, senior economist at CIBC Markets.

While that could take some of the shine off the loonie, any change in the small gap between U.S. and Canadian policy rates is unlikely to do much to the currency as the Fed remains largely cautious about further policy normalization, said analysts.

The price of oil, a major Canadian export, is still down over 58 percent since mid-2014, with very little upside expected in the future. That could continue to weigh on the loonie. [O/POLL]

After the oil price shock, Bank of Canada Governor Stephen Poloz shifted focus to a non-energy export-led revival of the economy driven by robust U.S. demand and helped by a weaker currency.

That recovery remains almost absent, Scotiabank's Osborne said, adding: "We can see non-resource exports continue to struggle, which is contrary to the narrative the Bank of Canada is sticking with at the moment."

Canada's trade gap unexpectedly widened to a record deficit in June as imports jumped and exports barely rose.

However, the third quarter trend in the U.S. economy is likely to be strong, and may bode well for Canadian exports, analysts said.

(For other stories from the FX poll:)

Polling by Sarmista Sen and Khushboo Mittal; Editing by Nick Zieminski

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