Brace yourselves, the loonie is expected to resume its losing streak in the months ahead: poll

The battered Canadian dollar is anticipated to weaken much more, associated with the ill fortunes of depressed oil prices and also the prospect of another rate of interest cut, a Reuters poll showed.

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After plunging to its weakest in 13 years in mid-January, to $1.4689 on Jan. 20, the Canadian dollar rebounded more than five percent because the central bank kept rates of interest on hold and also the price of oil, a major Canadian export, rebounded.

But there is little change hope that a massive oil supply glut in world markets is going to be soaked up considering clear evidence of waning demand, particularly from China. That suggests there’s more downward pressure on the loonie to come.

“Things are taking cues from crude prices, and nothing more strongly so compared to Canadian dollar,” said Adam Cole, head of G10 currency strategy at RBC Capital Markets.

The poll of 45 foreign exchange strategists forecast the currency to weaken to $1.42 inside a month from Wednesday’s close of $1.3773, a downgrade from $1.39 expected in January’s poll.

From there, the loonie will probably recover modestly to $1.40 in six months and $1.37 in a year versus $1.37 and $1.34 predicted in the previous survey. That’s about 30 percent below $1.067, where it was trading when oil prices plummeted. Oil is down more than 70 per cent since mid-2014.

The poll’s 12-month forecasts were in a particularly wide selection, from the seven per cent drop to a gain of 11 per cent. Saxo Bank, probably the most bearish around the Canadian dollar in the poll, expects $1.55 in six months and $1.50 in a year.

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The other unknown is exactly what the Bank of Canada will do with rates. It cut them twice this past year so that they can offset the oil price shock that eventually pushed the economy into recession.

And while many in financial markets expected it to cut again, it left rates unchanged at 0.Half at its latest policy meeting on Jan. 20.

But with barely any economic growth, some economists expect the central bank to reduce rates further, perhaps as soon as March.

That would keep your Bank of Canada on a completely different path in the U.S. Fed, which raised rates the very first time in nearly ten years in December.

The deeper the stop by crude prices, the much more likely it will likely be that U.S. and Canadian monetary policy diverges further, said RBC’s Cole.

Bearish bets around the Canadian dollar rose to their highest in five months a week ago, according Commodity Futures Trading Commission data.

However, Bank of Canada Governor Stephen Poloz continues to pin hopes with an export-led recovery in Canada driven with a weaker Canadian dollar and stronger U.S. demand.

But that hasn’t happened yet.

“To date the storyline continues to be certainly one of disappointments,” said Cole.

U.S. economic growth braked sharply in the fourth quarter, casting doubts not just on being able to lift Canadian export growth, but additionally on if the Fed will soon follow up on its December hike with another.

Hendrix Vachon, currency strategist at Desjardins Group, said it will be “trouble for the Canadian economy” if your boost to export growth doesn’t materialize, particularly when the economy is reeling underneath the double-barrelled blow of weak domestic demand and collapsing investment in oil production.

But Vachon, who forecasts the dollar at $1.37 in a year, expects a U.S.-led recovery in exports within the coming months and oil prices to pick up after the year.

? Thomson Reuters 2016