US Dollar Canadian Dollar Exchange Rate Forecast

US Dollar / Canadian Dollar Monthly 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 below parity 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 DollarInterest Rate Forecast

The struggles of the U.S. economy has started to weigh on the outlook for Canadian interest rates as the BoC has put the brakes on their tightening policy as they look to assess the impact of weaker demand from its main trading partner on their economy. Despite the narrowing of the spread discrepancy between the two yield outlooks the broader trends have driven “loonie” strength. An increasing hawkish stance from the Canadian central bank could potentially drag the pair lower, placing importance on Canadian fundamentals. However, the domestic picture may lose weight in monetary policy decisions if the broader economy shows signs of faltering.

US Dollar / Canadian Dollar Valuation Forecast

USDCAD Valuation Forecast: Bullish

Compared to its counterparts in the commodity bloc, the Canadian Dollar is the least overvalued against the greenback with USDCAD 16.6 percent below its PPP-implied exchange rate. The pair’s firm inverse correlation with the MSCI World Stock Index suggests this disparity will continue to widen in the near to medium term as the renewed stimulus from the Federal Reserve stokes risk appetite. As such, a long entry appears less than prudent despite the bullish implications of current positioning, with investors likely to be better served to wait for a larger disparity to develop over coming months.

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.