December 7, 2011 / 6:53 PM / 6 years ago

Loonie seen easing on Europe, growth fears: Reuters poll

TORONTO (Reuters) - Canada’s currency is expected to soften against the U.S. dollar over the next several months before recovering to current levels and rallying through parity in one year from now, a Reuters poll showed on Wednesday.

<p>A man holds the new Canadian 100 dollar bill made of polymer in Toronto November 14, 2011. REUTERS/Mark Blinch</p>

A survey of 48 global foreign exchange strategists released on Wednesday was slightly more pessimistic on the Canadian currency than a similar poll a month ago, with global growth slowing and many expecting the euro zone debt crisis to get worse before it gets better.

Median forecasts in the poll showed the currency at C$1.02 to the U.S. dollar, or 98.04 U.S. cents, one month from now, C$1.03, or 97.09 U.S. cents, in three months, and C$1.01, or 99.01 U.S. cents, in six months.

The currency traded near C$1.01 to the U.S. dollar on Wednesday.

The latest negative shock to markets came this week when rating agency Standard & Poor’s threatened to cut the credit rating of the euro zone’s financial rescue fund as European leaders raced to find a political solution to their sovereign debt crisis.

“There is a pretty clear out for the Europeans here and they seem to be heading towards it. But we’re just worried that although we kind of think that fiscal union is the only way out of this on a sustainable basis, we’re not quite sure if the politics can really move quickly enough to avoid a disorderly market event,” said Shaun Osborne, chief currency strategist at TD Securities.

“But even with progress, slow growth, quantitative easing, aggressive reductions in (European Central Bank) interest rates, at least through the early part of next year, it suggests that the euro should go lower. And that’s going to help the (U.S.) dollar rise modestly.”

With prospects for the European and global economies weakening, higher-risk currencies more sensitive to global growth - like Canada’s - would tend to underperform, he added.

In one year, the Canadian dollar is seen once again trading stronger than the U.S. dollar to reach C$0.99, or $1.01.

The previous survey in November had forecast the currency would trade at C$1.01 in one and three months, parity in six months and C$0.985 in one year.

“The 2012 story is one where Canada has a strong triple-A sovereign rating backing, which has it generating positive CAD flows, oil prices close to $100 which is positive-Canada, and we have a soft landing in China,” said Camilla Sutton, chief currency strategist at Scotia Capital.

“So all of that is supportive of the Canadian dollar, combined with what we think is a generally weaker U.S. dollar.”

Canada’s commodity-driven currency has mostly traded below par with the U.S. dollar since losing ground in late September, succumbing to widespread uncertainty and market volatility.

Canada became the first of the Group of Seven advanced economies to raise interest rates following the 2008 financial crisis, but its central bank has been on hold for more than a year as its view of the European debt crisis has darkened.

Higher interest rates tend to strengthen currencies by attracting international capital flows, while the prospect of lower official interest rates have dampened investor interest in the Canadian dollar as higher returns are sought elsewhere.

Polling by Bangalore polling team; Editing by Jeffrey Hodgson

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