Canadian dollar to remain weak as monetary policy paths split: Reuters poll

BENGALURU/OTTAWA (Reuters) - The Canadian dollar is expected to weaken through the rest of the year based on an outlook for steady domestic interest rates against an expected U.S. rate hike, though the loonie is not likely to revisit its lows for 2015, a Reuters poll found.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

The low price of oil, a major Canadian export, will continue to be a major risk for the currency. The Canadian dollar lost about 20 percent from its peak last July to its low in March as oil prices lost more than half of their value.

“Oil price movement will remain a key risk for the Canadian dollar,” Eric Theoret, currency strategist at Scotiabank, wrote in a note. “However, its significance appears to be fading with the Bank of Canada’s shift in focus toward the U.S. recovery.”

The Canadian dollar kicked off the year with a nearly 9 percent plunge in January as oil prices slumped and the Bank of Canada unexpectedly cut interest rates.

While the currency has managed to recover some gains since hitting a six-year low in mid-March, analysts see it softening in the months to come.

The median forecast from over 45 foreign exchange strategists has the Canadian dollar CAD=D4 trading at C$1.24 against the greenback, or 80.65 U.S. cents, in a month from now, not far from where it was trading on Tuesday.

The loonie is expected to weaken to C$1.26 in six months before firming slightly to C$1.25 in a year. That would see the currency avoid the low of C$1.2835 it touched in March, which has been the low for the year.

Meanwhile, Canada’s central bank is unlikely to move soon on rates.

“The Bank of Canada (waiting) on the sidelines, still trying to assess how long it will take to see the rebound they expect from lower oil (prices) and a lower currency to occur, will really start to contrast with a Fed that has begun a hiking cycle,” said Greg Moore, senior currency strategist at Royal Bank of Canada.

The U.S. Federal Reserve is expected to raise interest rates by September for the first time in nearly a decade, although there is speculation the economy isn’t strong enough to withstand a rate rise, and that the move might be delayed further. Higher rates mean higher borrowing costs, which may hurt spending by individuals and companies.

Economic growth in both the U.S. and Canada contracted in the first quarter of the year but both central banks have expressed optimism, along with economists and forex strategists, that their economies will rebound.

Since cutting rates to 0.75 percent, Bank of Canada Governor Stephen Poloz has upheld his view that non-energy exports and business investment will help drive growth later this year.

After staging a modest rebound at the start of the year, oil prices are expected to remain weak for the rest of the year due to global oversupply. [O/POLL]

Polling by Swati Chaturvedi and Siddharth Iyer; Editing by Ross Finley and Bernadette Baum