Process of ending NAFTA would 'damage' loonie, investments and put BOC on sidelines: Pimco
The Canadian dollar is likely to strengthen over the coming year, a Reuters poll showed, on the assumption uncertainty over trade lifts and a stronger economy boosting inflation will prompt the Bank of Canada to resume raising rates.
The loonie is forecast to rise to $1.27 per U.S. dollar in one month from around $1.28 on Thursday, the poll of more than 40 foreign exchange strategists taken Dec 4-6 showed. The currency is then expected to climb further to $1.25 in 12 months, matching the level projected a month ago.
For its part, the U.S. dollar, which is already on course for its worst calendar-year performance since 2003, is forecast in the same Reuters poll to lose a bit more ground against other major currencies next year.
"I think developments on the Canadian economy have been pretty constructive overall," said Alvise Marino, director of FX strategy at Credit Suisse in New York, who had one of the most aggressive 12-month calls, to $1.20.
"The kind of upward pressure that you are seeing on wages in the employment report does suggest that eventually you will see some pickup on the inflation front."
Canada's economy added nearly 80,000 jobs in November, much more than economists had expected.
Still, the Bank of Canada has turned more cautious on the outlook for the economy in recent months, after it raised interest rates for the first time in seven years in July and then again in September.
The central bank left its benchmark interest rate on hold at one per cent on Wednesday and gave few hints about when the next hike will come, noting uncertainty over trade.
Canada, the United States and Mexico are in the midst of renegotiating the North American Free Trade Agreement (NAFTA), prompted by U.S. President Donald Trump's administration in Washington. The outcome is important to Canada, which sends about 75 per cent of its exports to the United States.
"We do think [NAFTA uncertainty] is having a very strong impact in the policy deliberation process," said Mazen Issa, senior foreign exchange strategist at TD Securities. "It may be that the bank wants to wait until we have much better clarity on that front."
The sixth round of NAFTA negotiations is due to take place in Montreal on Jan. 23-28. President Trump has threatened to withdraw from the trade pact if it is not reworked in favour of the United States, and his negotiating team has set proposals that have alarmed their Canadian and Mexican counterparts.
But strategists say a deal is the most likely outcome and could open the door to further Bank of Canada rate increases. Money market traders currently expect the central bank to hike more than 50 basis points next year.
"Our forecast for the Canadian dollar assumes that the Bank of Canada will follow the Fed (U.S. Federal Reserve) in its monetary tightening," said Hendrix Vachon, senior economist at Desjardins. "A slight increase in oil prices is also expected by the end of 2018."
The currency has lost its tight link with the price of oil, one of Canada's major exports, in recent months. But that relationship could be recaptured if the oil price rose enough to boost investment in Canada's energy sector.
A separate Reuters poll on Wednesday showed oil analysts have raised their forecasts for crude prices next year after major producers agreed to extend output cuts.