Canada dollar to rally as global gloom lifts, say strategists: Reuters poll

© Reuters. Canada dollar to rally as global gloom lifts, say strategists: Reuters poll

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar will rally over coming months on a recovery in demand for riskier assets and as a solid domestic economy supports more interest rate hikes from a hawkish central bank, according to a Reuters poll.

The poll of more than 40 currency market strategists predicted the currency would climb to C$1.2850 to the greenback in three months from the C$1.3150 it was trading at on Wednesday.

The currency is expected to climb to C$1.2600 in a year, weaker than the C$1.2500 forecast in October's poll.

The Canadian dollar declined 1.9 percent in October, its worst monthly performance since February, as optimism after a deal to revamp the North American Free Trade Agreement was overshadowed by a plunge in global stocks.

Over the same month, the U.S. dollar (DXY) climbed 2 percent against a basket of major currencies.

"The loonie is currently penalized by investors' low risk appetite," said Hendrix Vachon, senior economist at Desjardins. "This situation is not expected to last, as the economic fundamentals are still encouraging."

Global equities have been pressured by a trade war between the world's two largest economies, the United States and China.

Canada runs a current account deficit and is a major exporter of commodities, including oil, so its economy could be hurt if the global flow of trade or capital slows.

In October, oil prices posted the worst monthly performance since mid-2016 amid worries about the outlook for demand and evidence of rising global crude supply.

To make matters worse for Canada, the price of its heavy crude traded at a record discount to U.S. oil during the month due to pipeline congestion. The differential slumped to more than $50 before recovering some ground, according to Shorcan Energy Brokers.

Still, the Bank of Canada was encouraged enough last week by prospects for the economy to lift its key interest rate to 1.75 percent. It said the rate would need to rise further to a neutral stance of about 3 percent to achieve its inflation target, and opened the door to a faster pace of tightening.

Economists in a separate Reuters poll this week expected the central bank to raise interest rates three times next year.

The Canadian dollar should attract support from a "fairly hawkish Bank of Canada," said Erik Nelson, a currency strategist at Wells Fargo (NYSE:WFC). "Canadian growth remains above potential, driven by solid domestic demand, while the resolution of NAFTA uncertainty should help rebalance the economy toward investment rather than consumer spending."

Canada's economy will continue to grow faster than its potential over the coming quarters as U.S. fiscal stimulus boosts demand for its exports, a Reuters poll of economists showed last month.

Still, Canada's productivity and credit growth face a threat from a flattening yield curve as it makes it less appealing to invest in long-term projects, and less still if the Bank of Canada meets its goal of a 3 percent interest rate.

(Other stories from the global foreign exchange poll:(nL3N1XB3NZ))