The Canadian dollar, which recently hit a 10-month high, is expected to weaken again in the coming months if the US Federal Reserve hikes interest rates as forecast in June and oil prices rally no further, a Reuters poll found.
The currency, nicknamed the loonie, has surged 13 percent from a 12-year low of C$1.4689 in January, helped by a partial rebound in oil prices, the Canadian government's recent fiscal stimulus plan and an unexpectedly strong start to the year for the economy.
Still, the poll of over 40 analysts showed the loonie will weaken to C$1.28 in a month, down 0.6 percent from Tuesday's close of C$1.2719, but not as much as was predicted last month.
It is then expected to fall further to C$1.30 in a year versus C$1.31 predicted in April. Forecasts ranged from a drop of 18 percent to a gain of 6 percent in 12 months.
"The Canadian dollar really is weakening on the basis of a generalised rebound in the US dollar based on Fed tightening," said Shaun Osborne, chief currency strategist at Scotiabank.
After raising rates for the first time in nearly a decade in December, the Fed is expected to hike rates twice this year, according to economists polled by Reuters. Markets are betting on only one hike, and not until December.
In contrast, the Bank of Canada is likely to hold policy steady until the third quarter of 2017.
While that could take some of the shine off the loonie, any widening of the tiny gap between US and Canadian policy rates is unlikely to do much to the currency as the Fed remains largely cautious about further policy normalisation, said analysts.
Bearish bets on the US dollar hit their largest since February 2013 last week. Investors were rather bullish on the Canadian dollar.
But the price of oil, a major Canadian export, is still down over 60 percent since mid-2014 and could continue to pressure the loonie.
Following the oil price shock, Bank of Canada Governor Stephen Poloz shifted focus to a non-energy export-led revival of the economy driven by a weaker currency and robust US demand.
On Wednesday, the government said Canada's trade deficit in March unexpectedly widened as exports sank for a second month on widespread weakness.
While export growth has shown signs of picking up, it is not yet sustained as demand south of the border remains uneven and there are widespread signs that consumer spending is soft compared with past recoveries.
Economists in Reuters polls have downgraded their growth forecasts for the US economy in 2016 consistently over the past year in monthly surveys, suggesting any material pickup in Canadian exports may be difficult.
"Markets may again start to question whether the non-energy side of the (Canadian) economy is recovering," said Adam Cole, global head of FX strategy in London at RBC Capital Markets. "It is too early to say the Canadian dollar is on an uptrend."