C$ seen steady over next year as U.S. economy dictates direction: Reuters poll

TORONTO Wed Jun 5, 2013 12:34pm EDT

The new Canadian five and 10 dollar bills, made of polymer, are displayed with the previously released 20, 50 and 100 dollar notes following an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013. REUTERS/Chris Wattie

The new Canadian five and 10 dollar bills, made of polymer, are displayed with the previously released 20, 50 and 100 dollar notes following an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013.

Credit: Reuters/Chris Wattie

TORONTO (Reuters) - The Canadian dollar is forecast to hold near current levels against the greenback in the year ahead, a Reuters poll showed on Wednesday, with the outlook for the U.S. economy and the risk its central bank will curb stimulus seen driving global currency moves.

The median forecast in the poll of 49 economists and foreign exchange strategists saw the Canadian dollar trading at C$1.03 to the U.S. dollar in one, six and 12 months from now. It is expected to trade stronger at C$1.02 in three months.

The Canadian dollar ended the North American session on Tuesday at C$1.0344 versus the U.S. dollar, or 96.67 U.S. cents.

It has weakened off since last month's poll, retreating some three percent since hitting a peak in early May. Robust U.S. economic data, which bolstered the view that the Federal Reserve might rein in its quantitative easing program in the coming months, pushed the Canadian currency to its softest levels in a year.

The latest predictions are weaker than the survey conducted in May, which saw the Canadian dollar trading at C$1.01 in one and six months, at C$1.015 in three months and at C$1.02 in 12 months.

The latest poll had a broad range of views, with a 20 cent spread between the most bullish and bearish views 12 months out. While some strategists agreed on the general economic outlook, they differed on its implications for the currency.

"Most importantly, the expectations on the Federal Reserve potentially tapering QE (quantitative easing) and the implications for the big dollar has been the biggest impact on USD/CAD and also what we had been expecting to be one of the main drivers," said Greg Moore, FX Strategist at TD Securities.

"The big picture over the one-year horizon still remains the same ... The Canadian economy will likely pick up as well, but probably not to the same degree," he added, noting Canadian fundamentals have not deteriorated much.

TD is among the more bearish banks, forecasting the currency will pull back to around C$1.06 in the coming months and retreat to C$1.11 a year from now.

Others say the U.S. recovery will benefit the Canadian dollar in the long run.

"Where we may depart from some others ... we see Canada getting some benefit from the U.S. recovery," said Don Mikolich, executive director, foreign exchange sales at CIBC World Markets.

"We're a little bit more optimistic about how 2014 looks for the Canadian economy and hence the Canadian dollar."

Stronger commodity prices and a hopeful global economic outlook will also mean less of a safety flight to the U.S. dollar, Mikolich said, and benefit risk currencies like the loonie, as Canada's dollar is also known.

CIBC's forecasts fall closer in line with the median over the coming months and the bank has pegged the Canadian dollar to trade at C$1.01 this time next year.

LAGGING THE UNITED STATES

The loonie's relative strength has been underpinned by the Bank of Canada's indication that its next interest rate move will be a hike. However, with the Canadian economy slow to gain steam, expectations on the timing of the next rate hike has been repeatedly pushed back.

Canada's economy, which had been outperforming its southern counterpart and biggest export partner, is now performing on par or falling behind the United States and is stuck in a slow expansion mode, some forecasters say.

This is a view supported by economic growth surveys conducted in recent months that shows U.S. growth outpacing Canada's this year and next. <ECILT/CA> <ECILT/US>

"We're no longer guaranteed to be the first one to raise rates. And that's always been a plus for Canada - to have that rate advantage potential," said Mikolich.

"We can have the bias (to hike), but it doesn't actually mean we're going to be the one to move first."

A Reuters poll last month saw economists pushing back the median forecast for the next interest rate hike to the fourth quarter of 2014, not far off from expectations the Federal Reserve will begin hiking interest rates again around 2015. <CA/POLL>

With a new governor taking the helm at the Bank of Canada, there is speculation whether outsider Stephen Poloz will tolerate a weaker Canadian dollar given his background at Canada's export credit agency. Neither Mikolich and Moore are convinced this will necessarily be the case.

Poloz will be speaking publicly for the first time on Thursday and market watchers will be parsing over his every word for hints on which direction he will take the country's monetary policy and in turn, what it will mean for the loonie.

(Reporting by Solarina Ho; Polling by Hari Kishan and Ramya Muthukumaran; Editing by Chizu Nomiyama)