The Canadian dollar is expected to drop further against the U.S. dollar in the coming months and stay weaker for longer than previously forecast, a Reuters poll of economists and currency strategists showed on Friday, with a pull-back in the U.S. Federal Reserve's stimulus program boosting the greenback.
The median forecast in the survey of 45 economists and foreign exchange strategists was for the Canadian dollar to trade at C$1.04 to the U.S. dollar in one month, and at C$1.05 in three months and six months.
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In a year's time, however, the Canadian currency is expected to rebound to C$1.04.
In a Reuters poll released in early July, the median forecast was for the Canadian dollar to trade at C$1.04 in one month and then strengthen to C$1.03 in three, six and 12 months.
The loonie, as Canada's currency is colloquially known, ended the North American session on Thursday at C$1.0324. It has see-sawed between C$1.02 and C$1.06 in the past two months.
Shaun Osborne, chief currency strategist at TD Securities, said his bank's view on the loonie was mostly predicated on the effect a slowdown in the Fed's asset-buying program would have on the U.S. dollar. He expects the Fed to start to pull back in September.
"We're not too far from fair value at current levels so we're not looking for the Canadian dollar to weaken off significantly," he said. "But after September, when the Fed starts to taper, we think that is going to add quite significantly to the (U.S.) dollar's value."
TD forecasts the loonie will fall to C$1.11 in a year's time, one of the survey's most negative views of the currency.
"More generally we think commodity prices probably are steady to somewhat softer, Canadian growth is probably going to stay relatively sluggish, and the Bank (of Canada) is not going to raise rates anytime soon," Osborne said.
NO QUICK RATE HIKE
The market doesn't foresee any Bank of Canada interest rate hike until the fourth quarter of 2014, according to a Reuters survey released in July.
Canada's economy depends heavily on the export of commodities and prices are generally lower. Copper prices have fallen some 9 percent so far this year, while gold has slumped more than 20 percent, while oil has gained about 11 percent.
Recent data has pointed to a Canadian economy still struggling to notch solid growth, with exporters particularly hurt by the sluggish global economy.
But the Bank of Canada last month forecast growth could jump in the third quarter, a sentiment echoed by some of those surveyed by Reuters.
"We still think that in the near term Canada is going to look a little soft, later this year we're going to get indications that growth is starting to bounce," said Mark Chandler, head of Canadian fixed-income and currency strategy at Royal Bank of Canada.
"We see it happening primarily on the back of better growth in the U.S. and consequently better Canadian exports," he said.
The United States is Canada's largest export market by far, making it likely but not assured that once the initial shock of Fed tapering wears off the Canadian dollar will show more strength.
"It's not a God-given right that just because the U.S. is growing Canada will too," TD's Osborne said.
(Reporting by Alastair Sharp; Editing by Peter Galloway and Nick Zieminski)