US Dollar Canadian Dollar Exchange Rate Forecast

US Dollar / Canadian DollarMonthly Technical Forecast

Monthly Chart

Prepared by Joel Kruger

Longer-term studies seem to be suggesting that the market is in the process of carving out a major base, with a fresh higher low now sought out by parity ahead of the next major upside extension beyond 1.3000. At this point however, will need to see a break back above 1.0850 to encourage the recovery prospects and accelerate gains. In the interim, any setbacks towards 1.0200 should be viewed as a formidable opportunity to build on longs, with only a monthly close back below parity giving reason for concern.

US Dollar / Canadian Dollar Interest Rate Forecast

Considerable pullbacks in Bank of Canada interest rate hike expectations have had surprisingly little effect on the US Dollar/Canadian Dollar pair. Instead, the short-term correlation between the Canadian Dollar and Crude Oil prices currently trades near record strength, and commodity prices have generally been the most important drivers of USDCAD volatility. On the margins, continued downgrades in Bank of Canada interest rate hike expectations could drive CAD losses (USDCAD strength). Yet it seems far more significant to monitor Crude Oil trends given their current influence over Canadian Dollar price action.

US Dollar / Canadian Dollar Valuation Forecast

USDCAD Valuation Forecast: Bullish

The Canadian Dollar remains firmly tied into the risk on / risk off dichotomy with USDCAD spot rates showing a strong inverse correlation with the MSCI World Stock index. This aligns the valuation landscape with that of risk sentiment amid increasing signs of a global economic slowdown – an outcome that is likely to produce renewed risk aversion – as USDCAD remains well below its PPP-implied “fair” exchange rate. We will look for upside momentum in the near to medium term.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.