Canadian dollar to dip near-term as economy weakens, Fed hikes: Reuters poll

[June 02, 2016]  By Fergal Smith

TORONTO (Reuters) - The Canadian dollar is expected to weaken in the near-term on prospects of slower economic growth and a U.S. interest rate hike this month or next, a Reuters poll found, but an eventual oil price recovery is set to bolster the currency over the longer term.

The currency has fallen nearly 5 percent since reaching a 10-month high at C$1.2461 on May 3 as economic data turned sour after a strong start to the year. Meanwhile, wildfires disrupted oil production in Alberta, and speculation has increased that the U.S. Federal Reserve will raise interest rates this summer.

The Canadian dollar is likely to weaken against the greenback "if the Fed really is in play here," said Scotiabank Chief Currency Strategist Shaun Osborne.

He expects events, such as a June 23 British referendum on whether to leave the European Union, to increase currency volatility.

The Reuters poll showed the Canadian dollar weakening to C$1.3140 in a month from Wednesday's close of 1.3075, recovering to C$1.3000 in six months and trading there in a year, matching the 12-month forecast in May.

A more sluggish economy is likely to contribute to near-term weakness in the currency.

"Even before the Alberta wildfires, we were looking for a slowdown in Canadian economic growth in (the second quarter) after a surprisingly strong start to the year," said RBC Capital Markets Chief Technical Strategist George Davis.

The Bank of Canada kept interest rates on hold last week, saying the economy would shrink in the second quarter because of the wildfires and then rebound later in the year.

After raising rates for the first time in nearly a decade in December, economists expect the Fed to hike again in September, a Reuters poll found, while the market has been increasing bets that it will happen this summer.

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

"The Canadian dollar ... is likely to soften over the medium term as the Federal Reserve does actually resume that rate hike cycle," said Nick Bennenbroek, Wells Fargo's head of currency strategy.

In contrast, the Bank of Canada is likely to hold policy steady until the third quarter of 2017, a Reuters survey of economists showed. Overnight index swaps imply a 16 percent chance of a rate cut this year.

Analysts expect return to full production for Alberta's oil sands and higher oil prices to help strengthen the currency later in the year.

Oil market experts polled by Reuters earlier this week forecast U.S. crude futures would average $42 per barrel in 2016, up $1.50 from last month's poll. So far this year, they have averaged around $38.

(Additional reporting by Anu Bararia; Polling by Krishna Eluri and Sujith Pai; Editing by Ross Finley and Lisa Von Ahn)

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