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Canadian dollar forecast to overcome trade worries and strengthen: Reuters poll

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo
FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar is forecast to rally over the coming year, a Reuters poll showed on Wednesday, as global economic strength and a broadly weaker greenback offsets smoldering investor fears of a trade war that could damage Canada's economy.

The poll of nearly 50 foreign exchange strategists taken March 1-6 predicted that the loonie will climb to C$1.2700 to the greenback, or 78.74 U.S. cents, in one month, from around C$1.2875 on Tuesday. It is then expected to climb in a year to C$1.2300, matching the forecast from last month's poll.

The Canadian dollar has bumped around in recent weeks on developments from North American Free Trade Agreement (NAFTA) talks between the U.S., Canada and Mexico, which the Trump administration last year said required renegotiation.

So far currency strategists and traders have opted to look on the bright side.

"Given an ongoing renegotiation of NAFTA and a lack of U.S. withdrawal we think there are pretty good conditions for sustained loonie strength," said Ranko Berich, head of market analysis at Monex Canada and Monex Europe.

Conditions supportive of the Canadian dollar include strong global and domestic growth and interest rate hikes from the Bank of Canada, Berich said.

The central bank has raised interest rates three times since July. A separate Reuters poll forecasts the benchmark rate to be left on hold at 1.25 percent on Wednesday but for rates to be raised two more times by the end of the year.

In the meantime, strong global growth could help raise demand for the commodities that Canada produces, including oil, metals and lumber. The U.S. dollar is also forecast to remain on a relentless downward path.

"All of those commodities are denominated in U.S. dollars," said Eric Theoret, a currency strategist at Scotiabank. "An environment of U.S. dollar weakness is supportive of commodities broadly."

The greenback fell last month to a three-year low against a basket of major currencies, while the price of U.S. crude oil has rebounded as much as 156 percent from its February 2016 trough around $26 a barrel.

Still, the potential collapse of NAFTA or a global trade war could hurt Canada's economy. Donald Trump's top economic adviser, Gary Cohn, quit on Tuesday, giving free trade skeptics the upper hand in the White House.

On Monday, the loonie touched an eight-month low at C$1.3002 after Trump appeared to tie possible exemptions for Canada and Mexico from proposed tariffs on steel and aluminum to a "new" NAFTA as well as other steps.

Canada is the largest supplier of both metals to the United States. It sends 75 percent of its exports to the United States.

"Of primary concern to us is uncertainty around the trade and investment climate leading to a shortfall of capital flow into Canada," said Ben Randol, senior FX strategist at Bank of America Merrill Lynch. "The more perceived risk, the more investors are likely to demand a currency adjustment."

The Bank of Canada has said that uncertainty about the future of NAFTA is weighing increasingly on the outlook for Canada's economy.

"If the U.S. does unilaterally withdraw from NAFTA, all bets are off," Monex Canada's Berich said.

(Polling by Indradip Ghosh and Khushboo Mittal; Editing by Ross Finley and Robin Pomeroy)