The Canadian dollar is expected to retreat to near six-year lows in the coming year, with the economic damage from cheap oil likely to trigger another Bank of Canada interest rate cut even as the US Federal Reserve sets the stage to tighten policy. The latest Reuters FX poll showed strategists slashed their forecasts from a month earlier after the Canadian dollar tumbled nearly 10 percent in January to its weakest since March 2009. That was almost as much as its losses for all of 2014.
The Canadian dollar, which traded near C$1.24 on Wednesday, is expected to weaken to C$1.26 against its US counterpart in a year, compared with C$1.18 forecasters said a month ago.
The median forecast among the 49 strategists polled showed they expect the loonie to trade at C$1.26 in a month and three months' time, and C$1.27 in six months.
Should the medians prove true, it would be a departure from recent history. During a roughly five-year period from the worst of the financial crisis through last September, when it began to fall sharply, it traded in a narrow range of C$0.94 to C$1.09.
The Canadian dollar found some temporary relief with a near 2 percent rebound this week on rallying oil prices, but the respite is expected to be short-lived.
An excess global supply of crude, combined with lukewarm demand has sent crude prices tumbling more than 50 percent since June. Oil has rallied sharply in recent days but it is far too early to declare the selling over.
As a major exporter, Canada has begun to feel the bite.
"Oil prices are likely to stay soft if not soften further over the course of the next few months," said Shaun Osborne, chief currency strategist at TD Securities. Osborne said TD is forecasting WTI crude prices to hit a low of $40 a barrel.
"Soft oil would reflect poorly on the Canadian economy - it just reinforces the outlook for lower rates."
The Bank of Canada, which shocked markets in January with a surprise 25 basis point interest rate cut, is already widely expected to cut again in March.
"If we do see crude levels struggle a bit more, we could see that probability of an additional cut in April being priced in to markets and of course this has obvious implications as to how weak the loonie will get going forward," said Bipan Rai, director of foreign exchange strategy at CIBC World Markets.
"As we move into the end of the first quarter and into the second half of the year, economic divergence is going to weigh on the Canadian dollar."
The US Federal Reserve said in its most recent statement that the US economy was expanding "at a solid pace", striking an upbeat tone that contrasted dramatically against other major central banks, which have moved to ease monetary policy.
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