Canadian dollar to weaken on NAFTA uncertainty, Fed rate hikes: Reuters poll

TORONTO (Reuters) - The Canadian dollar will weaken against its U.S. counterpart this year, pressured by trade agreement uncertainty and probable monetary policy divergence between the Federal Reserve and the Bank of Canada, a Reuters poll found on Friday.

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 loonie CAD= rallied 3 percent in 2016 and has gained additional ground at the start of 2017, helped by recent strength in the price of oil, one of Canada's major exports.

But the poll of more than 40 foreign exchange strategists shows the rally is not expected to last, with participants forecasting that the currency will weaken to C$1.3500 in six months, versus C$1.3223 at Thursday’s close.

Further losses are expected, with strategists projecting that the Canadian dollar will hit C$1.3600 by year-end.

“It is a story of relative central bank policy where we have the Fed hiking three times and the Bank of Canada that’s on hold,” said Eric Theoret, currency strategist at Scotiabank, who expects the loonie to weaken to C$1.4000 in six months.

The Bank of Canada last moved its policy rate in July 2015, cutting it to 0.50 percent. It is seen in no hurry to follow the recent interest rate hike by the Federal Reserve as Canada’s economy struggles to build momentum. [CA/POLL]

The Canadian dollar is “treading on thin ice,” with the economy contracting in October, the Bank of Canada’s three new core measures of inflation declining in November and non-energy exports disappointing, Theoret said.

“There are a lot of domestic risks that I think are underappreciated right now and that’s without even considering the impact of the recent macro prudential measures taken to rein in the housing market and what that might mean for construction activity in 2017.”

In October, Canada’s Liberal government boosted the stress test required on mortgages, its latest move to cool a housing market that some have called a bubble.

Adding to headwinds for Canada’s economy, a more uncertain outlook for the North American Free Trade Agreement after the U.S. election will hold back Canadian business investment, said Bipan Rai, senior macro strategist at CIBC Capital Markets.

U.S. President-elect Donald Trump has threatened to scrap NAFTA if he cannot rework it to his country’s advantage.

“I think we’ll see the Trump administration, Republicans, surprise markets with how quickly they are able to move on tax policies that are U.S. dollar favorable,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets.

He expects a hawkish Fed to weigh on the loonie over the coming months, but for losses to fade as Canada’s energy sector benefits from an extended period of oil trading above $50 a barrel.

(For other stories from the Reuters FX poll (nL4N1EW27X))

Reporting by Fergal Smith; Polling by Sarmista Sen and Purnita Deb; Editing by Ross Finley/Jeremy Gaunt