Canada dollar to rebound in 2019, supported by higher rates

TORONTO: The Canadian dollar is expected to rally in 2019, recovering some of last year's decline, as the Bank of Canada surprises speculators who are betting that it has already finished raising interest rates, a Reuters poll showed.

The poll of more than 50 currency analysts predicted the loonie, sensitive to moves in currency prices, would strengthen to 1.28 to the U.S. dollar in 12 months, or 78.13 U.S. cents, up 3.6 percent from Tuesday's close of 1.3273.

That follows a 8.4 percent decline for the currency in 2018, its worst performance in three years, as stocks and the price of oil, one of Canada's major exports, plunged in the final quarter of the year.

The Bank of Canada, which last month expressed some worry about the impact of lower oil prices on the country's economy, is expected to leave its benchmark interest rate unchanged at 1.75 percent later on Wednesday.

Its last rate rise was in October, when it raised rates for the fifth time since July 2017.

Money markets, which as recently as November had been pricing in three further increases from the central bank, now see no additional tightening. But market strategists said that the market has gone too far in pricing out further hikes.

"The general thesis here is that the bank has a bit more work to do on the rate front," said Shaun Osborne, chief currency strategist at Scotiabank, who also expects the price of oil to rebound and the U.S. dollar to weaken.

"Our base case is that the economy will grow above potential this year and next. Capacity constraints are becoming more evident. We expect this to keep upward pressure on inflation," Osborne said.

Even as the central bank turned more dovish in December, it reiterated that it will need to raise rates to a neutral range between 2.50 and 3.50 percent to achieve its inflation target.

"The macro outlook, while it does suggest a deceleration in economic growth, it is not a dynamic that threatens the Bank of Canada trajectory," said Mazen Issa, senior FX strategist at TD Securities. "We still expect to see a couple of hikes later this year, just back-loaded."

Still, Issa expects structural economic factors, such as loss of competitiveness, shifting of auto parts production to Mexico and financing of a current account deficit to limit gains for the loonie.

Canada has run a current account deficit every quarter since the third quarter of 2008, according to data from Statistics Canada.

On Tuesday, the national statistical agency said that the country's trade deficit more than doubled in November as exports declined for a fourth month in a row.