Loonie To Extend This Year's Rally If Global Risks Abate

The Canadian dollar will add to this year's gains over the coming 12 months as a potential easing of global economic risk reduces pressure on the Bank of Canada to provide support for Canada's commodity-linked economy, a Reuters poll showed.

The poll of nearly 40 currency analysts showed they expect the loonie to strengthen 1.5% to 1.30 per U.S. dollar, or 76.92 U.S. cents, in one year, from about 1.32 on Thursday. That matches the projection in November's poll.

"We are seeing global growth headwinds start to subside," said Mark McCormick (NYSE:MKC), global head of FX strategy at TD Securities.

If that were to transition into a better outlook for the global economy then "that environment would pull the Canadian dollar along", McCormick said.

Canada runs a current account deficit and is a major exporter of commodities, including oil, so its economy could benefit from a pickup in global growth.

Developments that could spur an improved outlook include greater clarity around Brexit and calming of the trade war between the United States and China, strategists said.

"We assume a narrow (U.S.-China) trade deal in 2020 prior to the federal election in the U.S.," said Simon Harvey, FX market analyst for Monex Europe and Monex Canada. "That will prompt a risk rally impacting crude markets, a marginal weakening of the U.S. dollar and a reduction in the external headwinds that face the Bank of Canada's current outlook on the economy."

On Wednesday, Canada's central bank said trade conflicts remained the biggest source of risk to the outlook but cited signs of global economic stabilization as it left its benchmark interest rate unchanged at 1.75%.

The bank has stayed on hold this year even as many of its global peers, including the Federal Reserve and the European Central Bank, have eased. Its relatively hawkish stance has helped support the Canadian dollar, which has been the top-performing G10 currency this year with a gain of more than 3% against the greenback.

Last week, a slim majority of economists in a Reuters poll expected Canada's central bank to leave interest rates on hold through to the end of next year. [CA/POLL]

Over the same period, money markets see about a 50% chance the central bank would cut rates. In September, the market was bracing for as many as three rate cuts.

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