By Fergal Smith
TORONTO, June 1 Canada's dollar is expected to
dip in the short term but stabilize in 12 months, a Reuters poll
showed on Thursday, as a strengthening domestic economy
encourages the Bank of Canada to prepare the market for interest
The loonie, which has been the weakest performer among G10
currencies this year, is expected to decline slightly in three
months to C$1.36 to the U.S. dollar, or 73.53 U.S. cents,
according to the median forecast in a survey of more than 50
foreign exchange strategists.
The currency has been buffeted this year by lower prices for
oil, one of Canada's major exports, while investors have worried
that the country's economy will suffer if a potential housing
bubble pops or the North American Free Trade Agreement is
But the poll respondents expect the currency to stabilize at
C$1.36 in six months and recover to C$1.35 in a year, around
where it was trading on Thursday.
Signals from the Bank of Canada that it is preparing to
tighten monetary policy as the domestic economy strengthens will
offset pressure from expected interest rate hikes from the U.S.
Federal Reserve, strategists said.
Data on Wednesday showed Canada's gross domestic product
grew at an annualized 3.7 percent pace in the first quarter
following a solid expansion in the second half of 2016. The
economy was also on solid footing as it ended the quarter, with
growth rising by a better-than-expected 0.5 percent in March.
"There doesn't seem that much slack left (in the economy) to
chew through," said CIBC Capital Markets economist Nick Exarhos.
"The Bank of Canada won't be that far behind the Fed."
He expects the central bank to lift its policy rate to 1
percent from 0.5 percent in the first half of 2018.
The central bank has not raised rates since 2010, but last
week it struck a more upbeat tone than investors had expected.
Canada's 2-year yield had fallen 64 basis points below its
U.S. equivalent in the first half of May, its widest gap in 10
years. But the spread has since narrowed to -59 basis points.
"The Bank of Canada will prepare the ground for interest
rate hikes in Canada," said Desjardins senior economist Hendrix
Vachon. "That's why we believe by the end of the year we may see
the Canadian dollar appreciating again."
Still, bearish bets on the Canadian dollar have reached a
new high, recent data from the Commodity Futures Trading
Commission and Reuters calculations show.
In May, the Trump administration set the clock ticking
toward a mid-August start to renegotiate NAFTA with Canada and
Mexico to try to win better terms for U.S. workers and
Also, progress on overhauling U.S. tax laws could give a
boost to the greenback, said RBC Capital Markets Chief Technical
Strategist George Davis.
He expects the loonie to weaken to C$1.40 by year-end but
recover to C$1.36 in 12 months as rebounding oil prices support
increased business investment and as the Bank of Canada begins
to raise rates.
(For other stories from the FX poll:)
(Polling by Sujith Pai and Krishna Eluri; Editing by Lisa Von