Canadian dollar set to rebound

The Canadian dollar will strengthen over the coming year, paring some recent losses, as higher oil prices offset higher interest rates from the US Federal Reserve and a more dovish stance from the Bank of Canada, a Reuters poll found. The currency is forecast to trade at C$1.3400 in three months, the poll of more than 50 foreign exchange strategists showed, little changed from Monday's close of C$1.3408.
Strategists then expect the loonie to strengthen to C$1.3100 in a year, weaker than the C$1.3000 level estimated a month ago. "We have a strengthening path for crude prices and that's really the primary driver behind the forecast for CAD (Canadian dollar) strength," said Eric Theoret, currency strategist at Scotiabank, who expects the loonie to strengthen to C$1.2500 in 12 months. Brent crude futures are forecast averaging $57.08 in 2017, versus $44.78 in 2016, a recent Reuters poll showed.
The expected rebound in the Canadian dollar comes after a 3 percent drop since the Bank of Canada said on October 19 that it had considered cutting interest rates at its policy meeting. On Friday it touched a seven-month low of C$1.3434. Some strategists expect the central bank's more dovish stance to pressure the Canadian dollar still more in the coming months.
"If we do see a rate cut in Canada ... there is a chance from that risk perspective that the Canadian dollar weakens much more than we currently envision," said Jimmy Jean, senior economist at Desjardins. Markets see a one-in-four probability of a rate cut by mid-2017, overnight index swaps data shows. Jean expects the loonie to weaken to C$1.3500 in three months before recovering to C$1.3100 in 12 months as rate cuts do not materialise and oil rallies.
At BMO Capital Markets, Greg Anderson, global head of foreign exchange strategy, expects Democratic candidate Hillary Clinton to win the US presidential election and for that to provide some relief for the Canadian dollar in the near-term. Republican presidential candidate Donald Trump has said he would renegotiate or scrap the North American Free Trade Agreement if he is elected. Still, Anderson forecasts that the loonie will weaken to C$1.3600 in the coming months as Federal Reserve rate hikes offset higher oil prices.
Beyond six months he expects the loonie to recover as deterioration in the US budget and current account deficits takes over as a driver of direction, pressuring the greenback.