Canadian dollar likely to weaken in short term if no sign of vigorous recovery: Reuters poll

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar is likely to slip in coming months as a collapse in global trade and the prospect of a more prolonged slowdown from the coronavirus pandemic put pressure on the currency, a Reuters poll of analysts showed.

The loonie has rebounded nearly 9% since reaching a four-year low in March as investors became optimistic that once lockdowns on households and businesses were eased, a strong recovery in global economic activity would be particularly beneficial for Canada's export-dependent economy.

But some analysts polled by Reuters in the June 1-3 monthly foreign exchange poll say that bout of optimism may have run its course for now.

"Maybe a lot of the good news is already in the CAD price," said Mazen Issa, a senior FX strategist at TD Securities. "Expectations for a V-shaped (recovery) I think are going to be sorely misplaced and in that kind of environment CAD might struggle."

In a V-shaped recovery, activity climbs sharply back to its previous peak.

While forecasts for the Canadian dollar were raised from the May poll, the currency was expected to weaken 2.9% to 1.39 in one month from about 1.35 on Wednesday. It was then expected to climb back to 1.37 in six months and 1.35 in one year.

The Bank of Canada on Wednesday said the outlook for the second half of the year and beyond is "heavily clouded." It estimates second-quarter gross domestic product will fall 10% to 20% further after dropping 2.1% in the first quarter compared with the final quarter of 2019.

"We believe there's still a lot of ground to cover before economic activity returns to pre-pandemic levels," said Hendrix Vachon, a senior economist at Desjardins. "Cautious optimism seems appropriate."

The central bank has slashed interest rates to near zero and begun for the first time a large-scale bond-buying program, while Ottawa is rolling out about C$300 billion in support measures, or 15% of GDP.

But structural economic factors, such as a record level of household debt and a dependence on oil exports, could be an impediment to the recovery, particularly if relations between the United States and China deteriorate.

"We are in a world where trade disruption will be generally in place," TD's Issa said. "Longer-term, I think there are a lot of fundamental concerns that lean negative for the CAD."

(Reporting by Fergal Smith; polling by Hari Kishan and Sumanto Mondal; editing by Larry King)