The recent upsurge in the Canadian dollar will peter out over the coming months as an expected widening gap between steady interest rates in Canada and rising U.S. rates eclipses higher prices for oil, one of Canada's key exports, a Reuters poll found.
The Canadian dollar, known as the loonie, is expected to weaken to C$1.32 per U.S. dollar in a month, versus C$1.31 at Monday's close, the poll of over 50 foreign strategists showed.
Further losses are expected, with strategists predicting it to hit C$1.35 in three months and C$1.36 in six months, similar to the previous month's consensus.
Up 3 percent since the start of the year, the loonie hit a four-month high of C$1.297 in January. It was helped by major oil exporters reducing supply and the greenback tumbling on concerns over U.S. President Donald Trump's stance on world trade and the dollar.
The U.S. dollar marked the fourth straight week of falls, and its worst start to the year in three decades. The Canadian dollar's fortunes have been driven in large part by those of its southern neighbour.
Expected rises in U.S. interest rates will soon offset the impact of higher energy prices, weakening the loonie against its U.S. counterpart, said Ian Gordon, a currency strategist at Bank of America Merrill Lynch.
"Eventually, the market will come around to the idea that the Bank of Canada is not going to hike rates to follow the U.S. Federal Reserve."
Having raised rates once each in 2015 and last year, the Fed is forecast to hike again twice this year. In contrast, the BOC is predicted to stay on hold until at least the third quarter of next year. [ECILT/US] [FED/R] [CA/POLL]
Canada's central bank cut rates twice in 2015 to soften the blow of the 2014 oil price crash and has kept them on hold since.
Volatility is likely in store for the Canadian currency, with Trump running a protectionist agenda and targeting a weaker greenback, while pledging hefty fiscal stimulus that could strengthen the dollar.
"There is a disconnect between Trump's trade and fiscal policies. We are going to see probably a bit more willingness in the new administration to tactically try to talk the dollar down, but that's not going to stop its upward trajectory if he delivers on his fiscal and tax reforms," said Gordon.
The range for the 12-month forecast in the poll remained wide, running from C$1.22 to C$1.45, only marginally changed from January's poll. The median view was C$1.36.
Wells Fargo, the top forecaster in Reuters FX polls in 2016, also expects the currency to weaken four percent over the coming year.
Oil at $54 a barrel, though on an uptrend, is still well below its high of the past decade. It is unlikely to go much beyond that level this year due to higher production in the U.S., a recent Reuters poll of analysts found. [O/POLL]
With Trump planning to renegotiate or scrap the North American Free Trade Agreement and probably impose a border adjustment tax, many expect the BOC will cut rates again.
At the January policy meeting, Governor Stephen Poloz left the door open for a rate reduction and warned that Trump's defensive trade posture would have "material consequences" for Canada. It sends over 75 percent of its exports to the U.S.
"Although Canada is probably not going to suffer the worst in terms of the more protectionist-leaning commentary in the U.S - that's going to be mainly focused on China and Mexico - it's still not a good situation in terms of growth and investment," said Andrew Grantham of CIBC Capital Markets.
(For other stories from the Reuters FX poll, [nL4N1FR3ZB])
(Polling by Khushboo Mittal and Vartika Sahu)