Canadian dollar seen higher but trade uncertainty to crimp gains: Reuters poll

[July 06, 2018]   By Fergal Smith

TORONTO (Reuters) - Canada's dollar will climb over the coming year, a Reuters poll showed, but forecasters are less bullish than they were a month ago as escalating trade uncertainty competes with expected Bank of Canada interest rate hikes.

The poll of more than 40 foreign exchange strategists predicted the Canadian dollar will rise to C$1.30 to the greenback, or 76.92 U.S. cents, in three months, from around C$1.3140 on Thursday.

The currency is expected to climb further to C$1.26 in a year, versus C$1.25 in the June poll.

Hawkish comments last week by Bank of Canada Governor Stephen Poloz have left money markets largely expecting the central bank to lift its benchmark interest rate, which sits at 1.25 percent, by 25 basis points next week. <BOCWATCH>

Up to three further tightenings are seen by the end of 2019, which would lift the policy rate to 2.25 percent. That would match the prediction of a Reuters poll.

Eric Theoret, a currency strategist at Scotiabank, expects the Bank of Canada to hike more aggressively than the market expects, giving the loonie a boost. He looks for the central bank to tighten five times over the next 18 months to a rate of 2.50 percent.

"It is a function of Canada being at or even above its potential (output) and the growth outlook supporting a push beyond that," Theoret said.

The potential for the U.S. dollar to weaken over the coming year could also raise prospects for the loonie.

"We are generally bearish on the U.S. dollar," said Daniel Katzive, head of FX strategy North America at BNP Paribas in New York. "That reflects the end of the Fed cycle and the softening of the U.S. economy as we head through 2019."

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

A weaker U.S. dollar could help support the price of commodities, which are some of Canada's major exports. The price of U.S. crude oil <CLc1> has traded this week at its highest in three-and-a-half years.

But Canada is also dependent on the export of autos. Its economy could be badly hurt if U.S. President Donald Trump, who has already slapped tariffs on steel and aluminum from Canada, follows through on a threat to impose auto tariffs.

Another headwind for Canada, which sends about 75 percent of its exports to the United States, is slow-moving talks to revamp the North American Free Trade Agreement.

"Any sort of resolution on NAFTA could be a while yet," said Mazen Issa, senior FX strategist at TD Securities. "We are still quite bearish (on the Canadian dollar) in the near-term."

Canada runs a current account deficit so its economy could be hurt also if the global flow of trade or capital slows.

"As the dynamics between the U.S. and China continue to escalate, the risk you run is that CAD will be caught in the crossfire," Issa said.

(Polling by Mumal Rathore, Manjul Paul and Sujith Pai; Editing by Chizu Nomiyama)

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