Canada's dollar is expected to hold its ground over the next month as economic growth moderates and the market awaits guidance from the Bank of Canada on the interest rate outlook after two rate hikes this year, a Reuters poll showed. The poll of more than 40 foreign exchange strategists showed expectations that the currency will rise to C$1.24 in a month, up about 1 percent from the C$1.2524 it was trading around on Thursday but weaker than C$1.23 expected in a poll conducted soon after the BOC's September 6 rate move.
Canada's dollar is now expected to strengthen to C$1.23 in three months versus C$1.24 estimated last month, trading around there in six and 12 months as well. "The story overall is very constructive when you look at the Canadian economy. We see that the spread is moving in the Canadian dollar's favor," said Eric Theoret, currency strategist at Scotiabank, who expects another rate hike in December.
The Canadian dollar rose last month to C$1.2057, its highest in more than two years, lifted by a strong economic performance in the first half that encouraged the central bank to raise rates in July and September. Speculators have raised bullish bets on the loonie to the highest since November 2012, data from the US Commodity Futures Trading Commission and Reuters calculations showed.
But after Canadian economy expanded in the first half at its strongest pace since 2002, growth slowed to a halt in July. The loonie has drifted as central bank officials have shifted to a more dovish tone, casting doubt on the prospects for another rate hike before the end of the year.
Canada's two-year note yield climbed in September above its US equivalent for the first time in more than two years and the spread has since stayed above parity. Still, a recent Reuters poll showed primary dealers believe the Bank of Canada is done raising rates this year and will wait until the first quarter of 2018 to tighten again.
Wells Fargo, the top forecaster in Reuters FX polls in 2016, expects the currency to gain more than 4 percent by year-end. But Krishen Rangasamy of National Bank outlined several risks. He said the loonie could weaken if the US Federal Reserve hikes rates again this year, whether or not the BOC raises rates at the same time.
"The other thing is the North American Free Trade Agreement. It's not clear yet what is going to happen." US President Donald Trump has vowed to scrap the trade deal if he is unable to work it to his country's advantage. He has already slapped hefty duties on Canada's softwood lumber.
With NAFTA trade accounting for 39 percent of Canada's gross domestic product but just 5 percent in the case of the US, policymakers in Canada have a reason to worry about the outcome of the talks. However, a recent Reuters poll of economists tracking the situation suggested that Canada and Mexico should get through the talks without much damage to their economies. The price of oil, a key Canadian export, may also drive the currency. But it is not likely to rise much beyond September's two-year highs this year due to growing US shale output, a separate Reuters survey showed.
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