A long sell-off that drove the battered Canadian dollar to a 12-year low this week is expected to end this year, a Reuters poll showed, although an expected extended period of easy monetary policy will keep a lid on any bounceback.
The currency weakened almost 20 percent against the US dollar in 2015, its worst year since the global financial crisis, as sliding oil prices drove its economy into a modest recession. The dollar, also called the loonie, is down by nearly one-third since crude prices first began to fall in mid-2014. Bank of Canada Governor Stephen Poloz, however, has said growth should rebound in time, partly because of stronger demand for Canadian exports from the United States - its biggest trading partner.
"The Canadian dollar as a floating exchange rate really acts as a shock absorber," said Shaun Osborne, chief FX strategist at Scotiabank, who expects it to trade around where it is now by the end of the year.
"It helps the economy adjust to the new reality of weaker commodity prices and the need for the non-resource side of the economy to strengthen."
The currency is expected to trade at C$1.39 against the greenback in a month, a bit stronger than Wednesday's 12-year low close of C$1.4071, according to the median forecast in the poll of 50 foreign exchange strategists.
It will appreciate to C$1.38 in three months, C$1.37 in six months, still down from the C$1.35 forecast for both horizons in the previous poll. The loonie is expected to recover modestly from there to C$1.34 in a year, roughly the same prediction as in the last poll.
Estimates in the latest survey ranged from a fall of 5 percent to a gain of 16 percent over the coming year. Saxo Bank, the most bearish on the Canadian dollar in the poll, is forecasting it at C$1.48 in 12 months.
Currency traders are keeping a close watch on the price of oil, a major Canadian export, which has fallen below $40 a barrel and raised expectations of another rate cut by the Canadian central bank this year to boost economic growth.
On the other hand, a recovery in crude oil prices would improve the outlook for the currency.
National Bank Financial sees the Canadian dollar at C$1.31 in 12 months, the most bullish of the biggest six Canadian banks. They expect oil prices to recover to $50 a barrel at the end of this year.
However, the link between currency depreciation and stronger economic growth through better export performance typically works with a lag, noted Sal Guatieri, senior economist at BMO Capital Markets.
"The currency's impact will only intensify as we go through the year," Guatieri added.
An ongoing challenge for the Canadian dollar will be continued easy monetary policy. After surprising markets with two rate cuts in 2015 to dull the sting of the oil price shock, the Bank of Canada has remained on the sidelines. By contrast, in the United States the Federal Reserve embarked on a tightening cycle last month, raising interest rates for the first time in nearly a decade, triggering further weakness in the Canadian dollar. It is expected to raise rates several more times this year while the Bank of Canada stays pat.
"In recent weeks, we have had a quicker sell-off than we had anticipated," said Andrew Grantham, senior economist at CIBC Capital Markets. "The divergent monetary policy between the Bank of Canada and the US, and oil prices as they moved recently is actually weighing on the Canadian dollar."
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