July 7, 2010 / 3:52 PM / in 8 years

Dollar seen steady before edging higher on rising rates

TORONTO (Reuters) - The Canadian dollar may be stuck at current levels in the short term as worries about global growth dominate, but it will get a slight lift from a tighter rate environment by year’s end, a Reuters poll showed on Wednesday.

The currency is expected to be at C$1.050 to the U.S. dollar, or 95.24 U.S. cents in one month, according to a median forecast of 43 strategists.

Deepening investor uncertainty about slower global growth and euro zone debt has battered the risk-sensitive Canadian dollar, pulling it from around parity with the U.S. dollar in April to a 2010 low of C$1.0854 to the U.S. dollar, or 92.13 U.S. cents, reached in May.

“Global economic momentum appears to have slowed for now,” said Benjamin Reitzes, an economist at BMO Capital Markets.

Expectations of a softer growth outlook will weaken commodity prices and, in turn, the Canadian dollar. Given that backdrop, the Bank of Canada may not be as aggressive in its rate hike campaign, said Reitzes.

“The bank won’t likely be as aggressive as what people had thought a few months ago so we’ll get fewer rate hikes by the end of the year than what we thought,” he said.

Late on Wednesday morning, the Canadian currency was at C$1.0519 to the U.S. dollar, or 95.07 U.S. cents.

In three and six months the currency is forecast to edge up to C$1.030 to the U.S. dollar. Twelve months from now, it is expected to climb further to C$1.020 to the U.S. dollar, or 98.04 U.S. cents.

That year-ahead prediction is slightly firmer than last month’s poll of C$1.0350 to the U.S. dollar.

The move higher will be aided by clarity around the pace of economic recovery, said Reitzes.

“We don’t think the slowdown is going to turn into a double-dip recession. Once that becomes clear toward the end of the year, then markets will start to charge up again,” he said.

About half of strategists polled see the Canadian currency at parity or higher against the greenback in 12 months, but the median views were generally softer than a poll conducted three months ago when strategists forecast the currency to be straddling parity with the U.S. dollar for some time.

ALL EYES ON JOBS DATA, BANK OF CANADA

Investors will be watching for Friday’s domestic employment figures for June, which are expected to show 15,000 jobs were added in the month, with the unemployment rate staying steady at 8.1 percent.

Avery Shenfeld, chief economist at CIBC World Markets, said markets will also be scrutinizing the Bank of Canada’s take on the global economy when it issues a rate announcement on July 20.

“The Bank of Canada viewed the Canadian economy as in solid shape. Its concerns lie in to what extent it should be building in a slowdown — or something worse — for the global picture,” said Shenfeld.

“The Bank of Canada might soften its economic forecast for Canada in light of the global economic concerns, but the key will be whether or not there’s any indication that it’s materially changing the outlook in terms of the inflation picture.” he said.

The central bank raised its key interest rate by a quarter point to 0.5 percent in June, making Canada the first G7 industrialized nation to do so after the global recession. However, the bank has given gave no clear indication on whether it will continue uninterrupted rate hikes.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, showed the market sees a 59 percent chance of a July rate hike.

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