Canadian yield discount set to crimp gains for the loonie: Reuters poll

[May 03, 2019]   By Fergal Smith

TORONTO (Reuters) - The Canadian dollar is set to strengthen over the coming year, helped by higher oil prices, but the currency's gains will be held back by the greater interest rate offered to holders of U.S. dollars, a Reuters poll showed.

The loonie, which has fallen 3 percent since February, is losing its usual tight link to the performance of stocks on Wall Street as investors pay more attention to domestic economic headwinds than signs of improved prospects for the U.S. economy.

But the poll of nearly 40 currency analysts taken April 29-May 2 expects the loonie will strengthen to 1.30 per U.S. dollar in 12 months, or 76.92 U.S. cents, from about 1.3475 on Thursday. That matches the forecast in April's poll.

"If you look at where the currency stands right now you could argue it should be a little cheaper because of the interest rate differentials ... but a little bit stronger historically on where oil is," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. "The two are very finely balanced."

Canada's 2-year yield trades more than 70 basis points below the equivalent U.S. yield, close to the biggest discount in about 12 years.

Last week, the Bank of Canada left its benchmark interest rate on hold at 1.75 percent. It made clear rate hikes were off the table for now, given the economy was struggling to cope with a weaker-than-expected housing sector, the negative impact of global trade friction and a slowdown in the country's oil sector.

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

While the price of oil has rallied by as much as 57 percent since December, that has not led to increased investment in Canada's energy patch. Moreover, a lack of pipeline capacity has capped the amount of oil Canada can get to the global market.

The economic impact of higher oil prices has not been as strong for Canada as in previous commodity cycles, said Shaun Osborne, chief currency strategist at Scotiabank.

Still, Osborne expects the higher price of oil to help boost the loonie and sees long-term challenges for the U.S. dollar.

"The story is still leaning towards more U.S. dollar negative than necessarily CAD positive, given the accumulation of (U.S.) deficits and the likelihood that the U.S. economy will slow," Osborne said. "I'm not persuaded that there is an awful lot more in this dollar move at this point. We are already carrying a pretty significant short CAD position."

Speculators raised in April their bearish bets on the Canadian dollar to the highest since January, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed.

(Polling by Manjul Paul, Sujith Pai and Sumanto Mondal; Editing by Ross Finley and Chizu Nomiyama)

[© 2019 Thomson Reuters. All rights reserved.]

Copyright 2019 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.