Currency strategists have slashed their forecasts for the beleaguered Canadian dollar and see it weakening through 2014 as central bank concerns about weak inflation keep interest rates at current low levels, a Reuters poll showed on Wednesday. Turmoil in emerging markets is also expected to keep currency traders' fingers near the sell button. Another major flare-up in those markets could push investors to dump the loonie - which is still not far from the 4-1/2 year low it set against the greenback last week - as they flee to safer havens.
The median forecast in the Reuters survey of 50 economists and currency strategists was for the Canadian dollar to be at C$1.11, or 90.09 US cents, in one month from now and to continue to trade at that level in three months.
In six months, the currency was seen weakening to C$1.12 and was forecast to continue at that level in 12 months. The Canadian dollar briefly fell below C$1.12 against the US dollar last week before bouncing back.
"Sentiment shifted quite rapidly and aggressively against the Canadian dollar just before yearend," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
February's poll showed a significantly weaker outlook for the Canadian currency than did the previous Reuters poll in January. In that survey, economists had expected the Canadian dollar to fall as low as C$1.09, but to take 12 months to get there. The currency broke through that level just two weeks into the year.
Selling intensified at the end of January after the Bank of Canada said that it has become more concerned about weak inflation and left the door open to an interest rate cut. Analysts still expect the bank to raise rates, however, but not until the second quarter of next year. The bank's benchmark rate is now at 1.0 percent.
The Canadian dollar is also being pressured by the market's perception that the central bank, which targets inflation, is comfortable with letting the currency weaken in the hope that the export and manufacturing sectors will reap benefits from its slide.
Boosting that viewpoint, Bank of Canada Governor Stephen Poloz said recently that the bank still sees the currency as being strong and that its strength still poses an obstacle to exports.
"The market jumped very, very quickly on that," Sutton said. "The market perceives Governor Poloz to be quite supportive of the impact that we have (from) a weakening currency in Canada."
Still, concerns over a more dovish Bank of Canada are likely not responsible for all the loonie's recent downturn, said Brad Schruder, director of foreign exchange sales at BMO Capital Markets in Toronto.
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