The battered Canadian dollar is anticipated to weaken much more, associated with the ill fortunes of depressed oil prices and also the prospect of another rate of interest cut, a Reuters poll showed.
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After plunging to its weakest in 13 years in mid-January, to $1.4689 on Jan. 20, the Canadian dollar rebounded a lot more than five percent because the central bank kept interest rates on hold and the price of oil, a major Canadian export, rebounded.
But there is little change hope that the massive oil supply glut in world markets will be assimilated considering clear proof of waning demand, particularly from China. That suggests there is more downward pressure around the loonie to come.
“Everything is taking cues from crude prices, and absolutely nothing more strongly so than the Canadian dollar,” said Adam Cole, head of G10 currency strategy at RBC Capital Markets.
The poll of 45 foreign currency strategists forecast the currency to weaken to $1.42 in a month from Wednesday’s close of $1.3773, a downgrade from $1.39 expected in January’s poll.
From there, the loonie will probably recover modestly to $1.40 in 6 months and $1.37 each year versus $1.37 and $1.34 predicted in the previous survey. That is about 30 percent below $1.067, where it had been trading when oil prices plummeted. Crude oil is down a lot more than 70 per cent since mid-2014.
The poll’s 12-month forecasts were inside a particularly wide selection, from a seven per cent drop to some gain of 11 per cent. Saxo Bank, the most bearish around the Canadian dollar within the poll, expects $1.55 in six months and $1.50 each year.
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The other unknown is exactly what the Bank of Canada will do with rates. It cut them twice last year so that they can offset the oil price shock that eventually pushed the economy into recession.
And while many in financial markets expected it to cut again, it left rates unchanged at 0.50 per cent at its latest policy meeting on Jan. 20.
But with barely any economic growth, some economists expect the central bank to lessen rates further, perhaps as soon as March.
That would keep the Bank of Canada on the very different path in the U.S. Federal Reserve, which raised rates for the first time in nearly a decade in December.
The deeper the drop in crude prices, the much more likely it will likely be that U.S. and Canadian monetary policy diverges further, said RBC’s Cole.
Bearish bets around the Canadian dollar rose to their highest in five months last week, according Commodity Futures Trading Commission data.
However, Bank of Canada Governor Stephen Poloz continues to pin hopes on an export-led recovery in Canada driven by a weaker Canadian dollar and stronger U.S. demand.
But that hasn’t happened yet.
“So far the storyline continues to be one of disappointments,” said Cole.
U.S. economic growth braked sharply in the fourth quarter, casting doubts not just on being able to lift Canadian export growth, but also on if the Fed will soon follow up on its December hike with another.
Hendrix Vachon, currency strategist at Desjardins Group, said hello is going to be “trouble for the Canadian economy” if a boost to export growth doesn’t materialize, particularly when the economy is reeling under the double-barrelled blow of weak domestic demand and collapsing purchase of oil production.
But Vachon, who forecasts the dollar at $1.37 each year, expects a U.S.-led recovery in exports in the coming months and oil prices to get by the end of the entire year.
? Thomson Reuters 2016
