C$ seen weakening as domestic economy struggles: Reuters poll

TORONTO Wed May 8, 2013 12:45pm EDT

TORONTO (Reuters) - The Canadian dollar is expected to weaken against the greenback in the year ahead, a Reuters poll showed on Wednesday, with some forecasters citing concern about the economy's slow rate of growth compared to that of the United States.

The median forecast in the poll of 51 economists and foreign exchange strategists saw the Canadian dollar trading at C$1.01 to the U.S. dollar in one and six months from now.

The currency is expected to weaken to C$1.015 in three months and extend that to C$1.02 a year from now.

"The domestic part will be a little bit frustrating. We have already seen the slowdown in housing activity, the slowdown in consumer borrowing. We think that will translate through to consumer spending as well," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.

The Canadian dollar ended the North American session on Tuesday at C$1.0044 versus the U.S. dollar, or 99.56 U.S. cents.

It has gained some 2 percent in the last two weeks, in part on the back of some better-than-expected domestic data.

But the domestic economy is seen growing at a slower pace than that of its southern neighbor and biggest export market, and has other challenges.

A Reuters poll released last month showed the Canadian economy is expected to grow just 1.6 percent this year and 2.4 percent next year. <ECILT/CA>

By comparison, U.S. growth is seen expanding by 2.0 percent this year, rising to 2.7 percent in 2014. <ECILT/US>

"We're not really getting any sort of traction from the very soft recovery in the U.S.," said Shaun Osborne, chief currency strategist at TD Securities, which is among the more bearish forecasters, projecting the currency will weaken to C$1.10 to the U.S. dollar a year from now.

"When you talk to foreign investors who've had exposure to Canada there is increasing concern about the housing sector here showing signs of softness," he said.

Sales of existing homes in Canada fell sharply in March from a year earlier, with recent data suggesting Canada may avoid a crash but suffer a prolonged housing slowdown.

GROWING PESSIMISM

Job losses and lackluster spending plans from businesses, and the threat of consumers joining them in the belt-tightening, add to the dismal outlook.

The latest forecasts were mostly weaker than those made a month earlier, when the loonie, as Canada's currency is colloquially known after the water bird on its dollar coin, was expected to approach equal value with the U.S. dollar in six months and still be there in a year.

The poll again showed a wide range of views on the loonie, with a more than 21 cent spread between the more bullish and bearish views six and 12 months out.

Canada's currency has been supported in recent quarters by the Bank of Canada's indication that its next interest rate move will be an increase. This compares to the U.S. Federal Reserve's easy monetary policy. But the impact of the Canadian central bank's tightening bias has been blunted as expectations about the timing of a rate hike move further and further into the future.

The central bank last month chopped its growth forecasts and suggested that slack in the economy was still building.

Economists broadly expect the U.S. economy to pick up the pace of growth in the second half of 2013 and for Canada to received a deferred benefit as its export trade grows on the expected uptick in demand.

"In the end, net exports will help," said RBC's Chandler. "But it's a problem of bridging that gap between weakening domestic demand and some improvement on the net export side."

(Polling by Namrata Anchan and Somya Gupta in Bangalore; Editing by Jeffrey Hodgson and Chizu Nomiyama)

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