Canadian dollar will strengthen if progress made in CUSMA review: Reuters poll

The Canadian dollar coin, the loonie, is displayed on Friday, Jan. 30, 2015, in Montreal. THE CANADIAN PRESS/Paul Chiasson

TORONTO -- Canada’s dollar will strengthen over the coming year against its U.S. counterpart so long as the domestic economy recovers and progress is made in the review of a continental trade pact, a Reuters poll showed on Thursday.

The median forecast of 31 foreign exchange analysts in a May 29 to June 3 poll was for the Canadian dollar to gain 1.4 per cent to 1.37 per U.S. dollar, or 72.99 U.S. cents, in three months - slightly weaker than the 1.3667 forecast in a survey last month.

In 12 months, the loonie was expected to be up 3.7 per cent at 1.3400, compared with 1.3433 in the previous forecast.

Canada had a positive meeting with the U.S. on the review of the Canada-United States-Mexico Agreement (CUSMA), the minister responsible for Canada-U.S. trade, Dominic LeBlanc, said in Washington on Tuesday. The trade deal has shielded most of the country’s exports from U.S. tariffs.

“The Canadian dollar needs to see progress and eventually resolution of the CUSMA talks before it can strengthen durably,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.

“Until then, it’s going to be challenging for the loonie as the economy remains under pressure from the uncertainty and as U.S.-Iran headlines whip the market around,” he added. Indeed, the Organisation for Economic Co-operation and Development warned on Wednesday that the entire global economic outlook hinged on how ​long the conflict in the Middle East lasts.

Data on Friday showed the economy unexpectedly slipped into a technical recession in the first quarter, reducing expectations for Bank of Canada interest rate hikes this year even as some Federal Reserve policymakers turn more hawkish.

The Canadian two-year bond yield has fallen about 35 basis points further below its U.S. equivalent in the past month to a spread of around 125 basis points. Still, analysts doubt the economic downturn will persist.

We expect “the Canadian economy will stabilize in H2 this year and accelerate next year, led by a stabilization in the real estate sector, improving investment climate and fiscal policy,” said Mirza Baig, a foreign exchange strategist at Desjardins.

Prime Minister ​Mark Carney has said he would prioritize lowering the cost of living in Canada, tackling a ‌housing shortage, and building major infrastructure projects to help make the economy less dependent on the United States.

(Reporting by Fergal Smith; Polling by Jaiganesh Mahesh; Editing by Hugh Lawson)