Canadian dollar upside seen shrinking if global economic recovery slows: Reuters poll

By Fergal Smith

TORONTO (Reuters) - There is less room for the Canadian dollar to gain ground over the coming year as analysts expect the prospect of slower global economic growth and accelerating inflation to undermine support from higher oil prices.

The median forecast of 45 strategists in an Oct. 1-6 Reuters poll was for the Canadian dollar to rise 0.7% in three months to 1.25 per U.S. dollar, or 80.00 U.S. cents, compared to 1.235 in last month's poll.

It was then expected to rise further to 1.23 in a year's time. In September, the forecast was for 1.22.

"We're expecting the U.S. dollar downside to be more limited in this current lower growth and higher inflation environment," said Simon Harvey, senior FX market analyst for Monex Europe and Monex Canada. "The loonie won't be as supported against the greenback's strength."

The safe-haven U.S. dollar has climbed in recent days to a one-year high against a basket of major currencies as investors fret surging energy prices could add to inflation pressures, putting the global economic recovery at risk.

Another headwind for the Canadian dollar - nicknamed the loonie and which has advanced about 1% since the start of the year, the best performance among G10 currencies - could be the sensitivity of Canada's economy to higher interest rates.

Private sector dependency on debt is higher in Canada than in the United States, said Bipan Rai, North America head of FX strategy at CIBC Capital Markets.

"It's more difficult for the Bank of Canada to raise rates as aggressively" as the Federal Reserve, Rai added.

Money markets see at least two interest rate hikes next year by the Bank of Canada compared with one from the Fed, so there could be room for expectations to adjust.

Canadian and U.S. employment data for September are due on Friday, which could offer clues on the policy outlooks of both central banks.

Still, analysts expect higher crude prices to help support the loonie. Canada is a major producer of oil, which climbed this week to a seven-year high.

"The Canadian dollar is expected to remain supported by high prices for several commodities and a gradual reduction in global economic uncertainty," said Hendrix Vachon, a senior economist at Desjardins.

(For other stories from the October Reuters foreign exchange poll:)

(Reporting by Fergal Smith; Polling by Prerana Bhat, Sarupya Ganguly and Indradip Ghosh, Editing by Emelia Sithole-Matarise)

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