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Optimism on eventual NAFTA deal lifts loonie

May 10, 2018  

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The Canadian dollar is expected to strengthen over the coming year as a clearer outlook for the NAFTA trade pact opens the door to more Bank of Canada interest rate hikes, a Reuters poll of currency strategists showed.

The loonie  has weakened in recent weeks against a broadly stronger U.S. dollar despite the price of oil, one of Canada’s major exports, surging to its highest in more than three years.

Strategists said the loonie has been pressured by the Bank of Canada’s caution on raising interest rates too fast in the face of a number of uncertainties for the domestic economy, such as a cooling housing market and renegotiation of the North American Free Trade Agreement.

“There is a lot of focus on NAFTA and other political noise at the moment, that is dampening the Canadian dollar,” Shaun Osborne, chief currency strategist at Scotiabank, told Reuters. “Once we get some clarity on that, hopefully in the next few weeks, I expect the Canadian dollar to strengthen.”

Ministers from Canada, the United States and Mexico have been pushing this week for a deal to rework the 24-year-old accord, seeking to resolve an impasse in key areas before elections in Mexico and the United States complicate the process.

Canada sends about 75 per cent of its exports to the United States so its economy could benefit if a deal is reached.

The Reuters poll of more than 45 foreign exchange strategists predicted that the loonie will rise to $1.26 to the greenback, or 79.20 U.S. cents, in three months, from around $1.277 on Thursday.

The currency, which hit a nearly seven-week low on Tuesday at $1.2998, is then expected to climb further to $1.24 in a year.