Canadian dollar outlook more bullish as global economy recovers: Reuters Poll

TORONTO (Reuters) - Strategists are growing more bullish on prospects for the Canadian dollar as global economic activity rebounds from the coronavirus crisis, a Reuters poll showed, with the loonie having already notched an eight-month high this week.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto, January 23, 2015. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)

The Canadian dollar is expected to weaken 0.6% to 1.32 per U.S. dollar, or 75.76 U.S. cents, in one month from about 1.312 on Thursday, but that level would still be stronger than the 1.35 forecast in an August poll.

The currency is then expected to strengthen to 1.30 in one year, compared with the 1.32 foreseen last month, the poll of more than 40 currency strategists showed.

On Tuesday, the loonie traded below 1.30 for the first time since Jan. 8. It has rallied nearly 12% since March.

“The underlying story is a steady recovery in global economic activity, which helps drive both USD weakness and CAD strength,” said Erik Nelson, a currency strategist at Wells Fargo.

The U.S. dollar .DXY hit a two-year low this week as investors bet a shift by the Federal Reserve to a policy of average inflation targeting would lead to interest rates staying lower for longer.

Canada is a major producer of commodities, including oil, so its economy is particularly dependent on global growth. Data on Thursday showed Canadian exports rose more than 11% in July, its third straight month of strong gains.

A staggered reopening from lockdowns, supported by fiscal stimulus, is likely paying off for Canada’s economy, with activity forecast to rebound in the current quarter twice as fast as in the United States, its biggest trading partner by far.

“Canada’s growth differential over the U.S. will be the main driver for continued loonie strength in 2020,” said Simon Harvey, FX market analyst for Monex Europe and Monex Canada.

Still, the Bank of Canada, which is due to make an interest rate decision next week, may not want a stronger currency to risk derailing economic recovery.

“We believe the Bank of Canada will start to take notice of the strength of the Canadian dollar and the repercussions any sustained rally will have on the economic recovery,” Harvey said. “The economic recovery is in its juvenile stages.”

The central bank said in July its benchmark interest rate would be left at a record low of 0.25% until activity catches up with the economy’s potential output, which it doesn’t expect until at least 2022.

(For other stories from the September Reuters foreign exchange poll:)

Reporting by Fergal Smith; Polling by Indradip Ghosh, Vivek Mishra and Mumal Rathore; Editing by Jacqueline Wong