The Canadian dollar's rout is probably near an end, a Reuters poll of foreign exchange strategists showed, but with energy prices falling and the economy likely in recession, the path of least resistance is down. Canada's commodity-driven currency has lost nearly 14 percent against the greenback since the start of 2015 as its economy shrank in the first three months of the year, and quite possibly in the April-June as well.
That, along with tumbling oil prices and a stronger US dollar in the run-up to the first policy tightening by the Federal Reserve in nearly a decade, sent the Canadian currency crashing to C$1.32 on Tuesday, its weakest since late 2004. The poll of 50 foreign exchange strategists forecast the Canadian dollar at C$1.31 in one month and six months and C$1.30 in a year, a strong downgrade from the C$1.25, C$1.27 and C$1.26 medians in last month's poll.
Still, there is significant risk the currency could weaken further due to the divide in predicted monetary policy paths between Canada and the US "The market is partially priced for another Bank of Canada rate cut ... but where we get the real divergence in the near term is that we expect the Fed to start hiking in September, which is less than 50 percent discounted by the market at the moment," said Adam Cole, global head of FX strategy at RBC Capital Markets.
"The risk of further rate cuts continues to overhang the market, and with commodity prices making new lows, that dynamic is still negative." Bank of Canada Governor Stephen Poloz has maintained his optimism the economy will regain momentum in the current quarter supported by stronger US demand for non-energy exports, and most economists in a recent Reuters poll agreed. They expect the bank to keep rates unchanged until the tail-end of 2016 even as the US Federal Reserve looks on track to hike rates in September.
That policy divergence is likely to add pressure on the Canadian dollar in the near term as investors favor the greenback. Investors have increased their bets against the loonie, according to Reuters calculations and the latest data from the Commodity Futures Trading Commission. Canada, a major oil exporter, is still staggering from a sharp fall in oil prices that began in June 2014 and lasted until the start of 2015.
Oil prices are falling again and a separate Reuters survey predicted any rebound will probably be capped by a global supply glut and a stronger US dollar. "It's the second-round effect of weaker oil prices which is only just becoming apparent and the growing evidence that the rebound in the activity the Bank of Canada had expected is going to take a lot longer to come through," said RBC's Cole.