The Canadian dollar is likely to start 2016 even weaker than thought a month ago as commodity prices remain depressed and the Bank of Canada takes a different monetary policy path from its US counterpart, a Reuters poll of currency strategists showed.
The Canadian dollar tumbled to its lowest in 11 years in September following a more than year-long crash in oil prices, two interest cuts from the Bank of Canada this year and a brief recession in the first half.
But with the economy falling shy of the central bank's growth estimate in the third quarter and oil prices expected to remain weak, the Canadian dollar will likely carry its losing streak through to next year.
The expected start of a US Federal Reserve rate hike campaign on December 16 could encourage investors to further reduce their Canadian dollar exposure in favour of the greenback.
"It basically is a story of soft commodity prices combined with the contrast between growth and an interest rate rise in the US, and sluggish growth and stable interest rates in Canada," said Shaun Osborne, chief foreign exchange strategist at Scotiabank.
The Canadian dollar is expected to trade at C$1.34 against the greenback in a month, around the same as Tuesday's close, according to a Reuters poll of over 40 currency strategists whose forecasts ranged from C$1.29 to C$1.40.
The poll showed the loonie will depreciate further to C$1.35 in three months and six months, a downgrade from C$1.33 and C$1.34 in the previous poll.
From there, the currency is forecast to recover modestly to C$1.33 in a year, the same as in the last poll.
The December poll's 12-month forecasts ranged from a drop of 8 percent to a gain of 12 percent. Morgan Stanley, the most bearish on the Canadian dollar in the poll, is forecasting C$1.44 in 12 months. Speculators have increased net short positions in Canadian dollars to 38,617 contracts on the Chicago Mercantile Exchange as of November 24, from 28,352 in the previous week, according to data from the US Commodity Futures Trading Commission.
The Canadian dollar has lost more than 25 percent since the start of the oil price plunge last year.
With the economy managing to crawl out of recession in the third quarter, driven partly by an acceleration in exports, the Bank of Canada will be more encouraged to stand pat on policy at its meeting later on Wednesday and into 2017. Bank of Canada Governor Stephen Poloz has said the weaker currency should lead to stronger US demand for Canadian exports and boost the economy.
But economists downgraded their US growth forecasts in the latest Reuters survey, suggesting any optimism of a US-led recovery in Canada may be short-lived. "The Bank of Canada is, probably, on the more optimistic side generally. There is still some time to wait before exports really improve on a consistent basis," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.
Economic activity in Canada declined by 0.5 percent in September, below forecasts, indicating softer momentum heading into the last quarter of the year and likely putting more pressure on the Canadian dollar.