By Fergal Smith
TORONTO (Reuters) – Canada’s dollar is expected to weaken over the coming months, a Reuters poll of 47 foreign exchange strategists showed on Thursday, as a rally driven by expectations for higher interest rates runs out of steam and lower oil prices weigh.
The median forecast is for the currency to retreat in three months to C$1.32 to the U.S. dollar, or 76 U.S. cents, before recovering some ground to C$1.31 in about a year. It was trading on Wednesday at C$1.2960, nearly its strongest in 10 months.
The loonie has soared more than 6 percent since early May, boosted by a strengthening domestic economy and rising expectations the Bank of Canada will hike interest rates as early as next week.
The central bank’s top two officials asserted in June that a pair of 2015 interest rate cuts had done their job in cushioning the economy from collapsing oil prices.
But the currency’s rally may get long in the tooth if the Bank of Canada does not indicate it is prepared to tighten beyond taking back the two cuts from 2015, termed “insurance” at the time, by raising rates.
“Unless the (central) bank comes out overtly hawkish next week and the market starts pricing in a third hike for the coming year,” it will be difficult for the Canadian dollar to strengthen further, said Bipan Rai, senior macro strategist at CIBC Capital Markets.
The central bank may want to see more progress on reaching its 2 percent inflation target before it goes further than taking back the insurance cuts, Rai said.
Inflation has held well below the target, even as Canada’s economy grew at an annualized 3.7 percent rate in the first quarter after a strong expansion in the second half of 2016.