Canada's dollar will strengthen over the coming year as economic growth prompts the Bank of Canada to raise interest rates again, a Reuters poll showed, but strategists see risk to their bullish forecasts from NAFTA talks. The poll of more than 40 foreign exchange strategists predicted the loonie will rise to C$1.27 to the greenback, or 78.74 US cents, in three months, from around C$1.2954 on Thursday.
After hitting a 2-1/2-month low on Tuesday at C$1.3067, the currency is expected to climb further to C$1.25 in a year. "The Canadian economy is hitting its potential growth rate," said Derek Halpenny, European head of global markets research at MUFG Bank. "This will result in the BoC raising rates in July."
Canada's central bank has raised its benchmark interest rate three times since last summer to leave it at 1.25 percent. Economists polled by Reuters expect it to hike twice more this year. Chances of further tightening as soon as next month have climbed to about 70 percent, data from the overnight index swaps market showed, from less than 50 percent before a recent policy statement from the central bank that was more hawkish than the market had expected.
"We think the Bank of Canada will basically be on a hiking path that is not dissimilar to the Federal Reserve," said Ranko Berich, head of market analysis at Monex Canada and Monex Europe, who expects the loonie to strengthen to C$1.19 in 12 months.
Berich said Canada has "a lot of leverage over the United States" in negotiations to revamp the North American Free Trade Agreement because it is a major buyer of American goods, including many manufactured products. But if the US does withdraw from the 24-year-old accord it could "blow the loonie to pieces."
Canada sends about 75 percent of its exports to the United States. In addition to slow-moving NAFTA talks, policymakers have been fretting recently about the impact of new US tariffs on steel and aluminium imports. Top US allies are set for a showdown with Washington at this week's G7 summit in Canada as the Trump administration shows no sign of backing down from protectionist policies that have upset trading partners and unnerved investors.
Reduced risk appetite could weigh on the Canadian dollar because Canada depends on capital flows to finance its current account deficit. "When risk aversion picks up, volatility picks up, capital flows tend to dry up and you get risk of undershooting on the exchange rate," said Ben Randol, senior FX strategist at Bank of America Merrill Lynch.
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