Canada's yield advantage seen underpinning loonie over coming year

The Canadian dollar, this year's G10 pacesetter, will edge higher over the coming 12 months, supported by the solid performance of Canada's economy and its high yield relative to other major currencies, a Reuters poll showed.

The Oct. 31-Nov 6 poll of more than 40 currency analysts showed they expect the loonie to dip slightly to 1.32 per US dollar, or 75.76 US cents, in three months but to then head higher.

Strategists see the Canadian dollar climbing to 1.30 per US dollar in 12 months, stronger than the 1.3058 projection in October's survey.

The Bank of Canada turned more cautious last week, cutting its economic forecasts as it worried Canada's economy would be "increasingly tested" by trade uncertainty.

But the central bank left its benchmark interest rate on hold at 1.75% last week, persevering with an unchanged rate this year even as many of its peers have eased.

The bank will wait until the first quarter of 2020 before easing, a separate Reuters poll of economists showed last month.

Last week's rate cut by the US Federal Reserve, the third since July, has lowered the range for its policy rate to below the Bank of Canada's equivalent for the first time since December 2016.

Meanwhile, the European Central Bank, the Swiss National Bank and the Bank of Japan have set policy rates that are zero or negative.

"Canada yields are close to or at a premium against most of the other G10 currencies now and we think that warrants a break lower in dollar-Canada," said Daniel Katzive, head of FX strategy, North America at BNP Paribas in New York. "We'll probably trade through 1.30 in the relatively near term, so we're constructive on the loonie."

Investors appear to agree. They have raised bullish bets on the loonie to the highest level since December 2017, according to data from the US Commodity Futures Trading Commission and Reuters calculations.

Since the start of the year, the Canadian dollar has climbed nearly 4% against the greenback, the biggest advance among G10 currencies.

"Our forecast for CAD strength mainly reflects ongoing sturdiness in the Canadian economy and our outlook for broad US dollar weakness over the next year or so," said Erik Nelson, a currency strategist at Wells Fargo.

Canada's economy has added jobs this year at a robust pace and the rate of inflation has stayed near the Bank of Canada's target of 2%.

Optimism the United States and China would reach a trade deal has helped push global shares to a record high this month.

The loonie is seen as sensitive to prospects for global growth because Canada is a major exporter of commodities, including oil.

The prospect of increased fiscal spending next year could also support the loonie if it were to boost the outlook for Canada's economy.