By Fergal Smith

By Fergal Smith

(Reuters) - The Canadian dollar is expected to weaken slightly against the U.S. dollar over the coming months, a Reuters poll found, with a sluggish domestic economy and lower oil prices seen weighing on the commodity-linked currency.

The poll of more than 50 foreign exchange strategists showed the currency will weaken to C$1.3200 in three months, down almost 1 percent from Tuesday's close of C$1.3102. That matches the 3-month forecast from last month's poll.

The currency has weakened nearly 5 percent since May 3 when it reached a 10-month high of C$1.2461 against its U.S. counterpart.


"We do see oil prices coming under continued pressure throughout Q3 so we think that is going to weigh on the Canadian dollar," said Ian Gordon, FX strategist at Bank of America Merrill Lynch. Canada is a major oil exporter.

"A lot of the shock from the oil price decline that we saw from 2014 through to 2015 hasn't fully been felt yet ... the (Canadian) economy is going to continue to struggle particularly against a backdrop of a weakened export sector," he added.

Crude oil has tumbled more than 20 percent from its recent peak in June, dipping below $40 a barrel on Tuesday. It traded above $100 a barrel in mid-2014.

George Davis, chief technical strategist at RBC Capital Markets, also expects soft exports and lower oil prices to weigh on the Canadian dollar, as well as "fallout from the Alberta wildfires" in May and June.

The Bank of Canada has said the shutdown of oil sands production facilities and the evacuation of residents during the wildfires cut about 1.1 percentage points from annualized GDP in the second quarter.

"To the extent that firmer U.S. economic data may cause the market to price in the increased probability of a Fed hike by year end, it will also lend some support to the greenback," Davis said.

The U.S. Federal Reserve last month left interest rates unchanged but said near-term risks to the U.S. economic outlook had diminished, opening the door to a resumption of monetary policy tightening this year.

In contrast, the Bank of Canada is expected to keep rates unchanged for at least another year given the depressed price of oil and risks to global economic growth from Britain's shock June 23 vote to leave the European Union. [CA/POLL]

A return of risk aversion would be an additional headwind for Canada's risk-sensitive currency as Brexit materializes and investors realize the limits of central bank action, said Krishen Rangasamy, senior economist at National Bank Financial.

Still, forecasters expect the Canadian dollar to recover to C$1.305 in 12 months, almost matching the previous poll's forecast, helped by a better growth profile next year.

"We think that we will see stable consumer spending, an increase in business investment and better growth driven by announced government stimulus," RBC's Davis said.

(Additional reporting by Anu Bararia in Bengaluru; Editing by Ross Finley and Paul Simao)

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