By Fergal Smith
TORONTO (Reuters) - Strategists see little upside for the Canadian dollar over the coming months, cutting their bullish forecasts for the currency as worries about the global economy boost demand for higher-yielding U.S. dollars, a Reuters poll showed.
The loonie has climbed more than 2 percent since the start of the year even as it has lost ground since February, making it the second best performing currency in the G10 after sterling.
According to the poll of nearly 50 currency analysts, the loonie will strengthen slightly to 1.33 per U.S. dollar in three months, or 75.19 U.S. cents, from about 1.335 on Thursday. That is a weaker forecast than the 1.31 level seen in March's poll.
Strategists were more upbeat about the currency over a one-year horizon, expecting it to climb about 2.7 percent to 1.30.
"We still remain optimistic on the loonie but our (U.S.) dollar forecasts as a whole reflect a longer period of dollar strength and uncertainty over global growth in the short run," said Ranko Berich, head of market analysis at Monex Europe.
Canada is running a current account deficit and exports many commodities, including oil, which has rallied nearly 50 percent since December, so its economy could be hurt by a global slowdown.
Data last month showed Canada's economy barely grew in the fourth quarter due to plunging Canadian crude oil export prices, while the Bank of Canada has signaled it is in no hurry to raise interest rates again after tightening its benchmark rate by 125 basis points since July 2017 to 1.75 percent.
The U.S. Federal Reserve could also be on hold, with the fed funds rate set to stay in a range of 2.25 percent to 2.50 percent, according to economists in a Reuters poll.
Both the U.S. and Canadian yield curves inverted in March, with rates on long-term bonds trading below short-term rates for the first time in more than a decade. But inversion of Canada's curve has not always led to a recession.
"Our scenario calls for the Canadian economy to improve this spring, which could help the loonie," said Hendrix Vachon, a senior economist at Desjardins. "The gains should be limited by ongoing concerns, particularly regarding developments in the housing market and business investment."
Canadians have taken on record amounts of debt in recent years, which helped fuel a rapid rise in real estate prices. But the housing market has softened since the start of 2018, weighed by tighter mortgage rules and Bank of Canada rate hikes.
The prospect of limited movement for the loonie is reflected in the volatility used to price FX options. At an annualized 5.65 percent, 3-month implied volatility for the Canadian dollar is trading near its lowest since September 2014.
"Our view is that dollar-Canada is one of the few G10 currencies which the option market has correct, in the sense that it really shouldn't have big moves from here," said Daniel Katzive, head of FX strategy North America at BNP Paribas (PA:BNPP) in New York.
"We think Bank of Canada and Fed policy settings are not going to diverge too much further ... we don't really see oil making enough of a move to justify a big adjustment in dollar-Canada either," Katzive said.