Canadian dollar to gain but needs NAFTA deal to score home run: Reuters Poll

By Fergal Smith

TORONTO (Reuters) - Canada's dollar will rise over the coming year as the Bank of Canada hikes interest rates and higher oil prices become more supportive of the currency, a Reuters poll showed, but it will take a NAFTA trade pact deal to trigger more optimistic gains.

The poll of more than 40 foreign exchange strategists predicted the Canadian dollar, which has been pressured this week by a diplomatic dispute between Saudi Arabia and Canada, will edge higher to C$1.30 to the greenback, or 76.92 U.S. cents, in three months, from C$1.3023 on Wednesday.

The currency is expected to climb further to C$1.26 in a year, matching the forecast of the July poll.

"The core of the loonie outlook for us is that Canada has one of the very few central banks, arguably the only central bank, that is on a hiking cycle that is broadly comparable to what the Federal Reserve is doing," said Ranko Berich, head of market analysis at Monex Canada and Monex Europe.

The Bank of Canada, which expects the rate of the country's economic growth to accelerate to 2.8 percent in the second quarter, has raised interest rates twice since January to match the pace of the Federal Reserve this year.

Money markets expect the Bank of Canada to hike once more by December. Its benchmark interest rate is 1.75 percent.

At BMO Capital Markets in New York, global head of foreign exchange strategy Greg Anderson also expects the Bank of Canada to tighten at a faster pace than some other major central banks, including the Bank of England, the European Central Bank and the Bank of Japan, and for the higher price of oil to boost the currency.

"On a one-year horizon into the next year, at some point that (higher oil price) starts to matter, particularly as you get closer to a new pipeline being finished," Anderson said.

Enbridge Inc (Toronto:ENB.TO - News), Canada's largest pipeline operator, reaffirmed on Friday that its Line 3 pipeline is expected to be in service in the second half of 2019.

The price of oil , one of Canada's major exports, has climbed 36 percent over the past year to nearly $67 a barrel but the benefit for the Canadian dollar has been blunted by an uncertain outlook for trade.

"Trade-related uncertainties are to blame because they hurt the economy," said Krishen Rangasamy, senior economist at National Bank Financial. "Remove that uncertainty with regards to trade and yields should improve, allowing the loonie to move closer to levels consistent with current oil prices."

Canada's economy could be badly hurt if U.S. President Donald Trump, who has already slapped tariffs on steel and aluminum from Canada, follows through on a threat to impose auto tariffs.

Another question mark for Canada, which sends about 75 percent of its exports to the United States, is long-running talks to revamp the North American Free Trade Agreement (NAFTA).

"If a NAFTA deal were to be reached and that uncertainty lifted, it is probably worth two to five percent upside for the Canadian dollar," BMO's Anderson said.

(This version of the story removes word "bond" in Rangasamy quote in 11th paragraph)

(Polling by Indradip Ghosh, Manjul Paul and Mumal Rathore; Editing by Richard Balmforth)