Canadian dollar seen higher as NAFTA risk premium fades: poll

[April 06, 2018]   By Fergal Smith

TORONTO (Reuters) - The trade-sensitive Canadian dollar is set to advance over the coming year as prospects improve for a revamped NAFTA trade deal and the Bank of Canada continues to raise interest rates, a Reuters poll of currency strategists showed on Friday.

Upbeat comments by officials from the United States, Mexico and Canada about the chances of a pact soon on the North American Free Trade Agreement have helped boost the loonie in recent days. On Thursday, it notched its strongest in more than five weeks at C$1.2745.

"We see a high chance of a NAFTA deal being done or progressing to such an extent that markets are happy removing much of the risk premium associated with that uncertainty," said Derek Halpenny, European head of global markets research at MUFG Bank.

Canada sends about 75 percent of its exports to the United States.

Adding to recent support for the loonie has been higher oil prices. Canadian heavy crude tends to trade at a discount to U.S. crude but the gap has plunged by $14 since March to $16.15 at Wednesday's close, data from Shorcan Energy showed. <SHRWCSMc2>

"This is helping CAD now and could have further to run," Halpenny said.

The poll of more than 40 foreign exchange strategists predicted that the loonie will edge up to C$1.2700 to the greenback, or 78.74 U.S. cents, in three months, from around C$1.2750 on Thursday.

The currency, which hit a nearly nine-month low in March at C$1.3124, is then expected to climb further to C$1.2500 in a year.

The Bank of Canada has raised its benchmark interest rate three times since July to 1.25 percent.

Money markets, as well as economists polled by Reuters, expect the central bank to hike twice more this year.[CA/POLL]

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

The Bank of Canada could tighten policy more if the economy, which it says is operating close to capacity, grows faster than its potential and inflation pressures start to build.

"Our growth outlook suggests that the BoC should retain a hawkish tilt and raise rates once each quarter through the rest of the year," said George Davis, chief technical strategist at RBC Capital Markets.

RBC expects the economy to grow by 1.9 percent this year. The Bank of Canada's estimate of sustainable growth is 1.6 percent.

Recent data has pointed to growth for the first quarter that is weaker than the central bank's 2.5 percent estimate. Also, Canada's commodity-linked economy could be hurt by a potential trade war between the United States and China.

But economists have said that provincial fiscal stimulus can give the economy a shot in the arm after Ontario and Quebec last week delivered pre-election budgets that promised billions of dollars of increased spending on government programs.

"We still believe that the Canadian economy and inflation will be strong enough" to push the Bank of Canada to raise interest rates further over the coming months, said Hendrix Vachon, senior economist at Desjardins. "We expect the loonie to appreciate in the near future."

(Reporting by Fergal Smith; Editing by Bernadette Baum)

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