The Canadian dollar is likely to bounce back from its recent trough over the coming year, supported by prospects of more interest rate hikes and higher oil prices, but it probably will not strengthen as much as previously thought, a Reuters poll of currency strategists showed last Thursday. Respondents broadly downgraded their forecasts from an October poll, suggesting expectations of further tightening by the Bank of Canada may be waning against a backdrop of continued tame inflation.
Having tumbled to a more than three-month low against the greenback in October, the loonie is now forecast to gain more than 1.5 percent to C$1.25 per US dollar in the next year from around C$1.27 on Wednesday. That is much weaker than the October outlook for nearly 2 percent appreciation to C$1.23. Reuters took that poll before the dollar's latest spill.
Responses in the latest poll were based in part on data showing growth had ground to a halt in July after clocking its strongest first half in 15 years. Forecasts ranged from C$1.14 to C$1.35 per greenback on a 12-month horizon, versus C$1.15 to C$1.31 in October, suggesting some strategists have become more pessimistic about the Canadian currency's prospects.
The Bank of Canada is still monitoring the economy's performance after rate hikes in July and September, Governor Stephen Poloz said on Tuesday. It is maintaining a neutral tone on its next move. The US Federal Reserve, by contrast, seems on track to lift borrowing costs next month, for the third time this year. Scotiabank strategist Eric Theoret said the Bank of Canada's apparent reticence about delivering another rate hike was the biggest near-term risk to the currency.
"They are definitely a lot more tentative on their willingness or their ability to complete more tightening from here, and it's much more of a muted path," Theoret said. Markets are pricing in a less than 10 percent chance of a rate hike in December, while the odds of a March increase stand at about 70 percent. Speculators cut bullish bets on the loonie from a five-year high struck in October, according to the latest data from the US Commodity Futures Trading Commission and Reuters calculations. But not everyone is negative about the loonie's prospects.
"You could expect the Canadian dollar to make a comeback early next year," said National Bank senior economist Krishen Rangasamy. "We think the Bank of Canada is going to be a bit more aggressive than markets are currently expecting in 2018." The loonie's correlation with the price of oil, a major Canadian export, will also become more positive, he said. Last month, Poloz said that while monetary policy decisions would affect the Canadian dollar, oil prices would have the biggest long-term impact on the currency.
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