US Dollar / Canadian Dollar Monthly Technical Forecast
Prepared by Jamie Saettele
The USDCAD drop is accelerating and the only point of reference for support is a downward sloping trendline at 9415 next week. RSI confirms the new low on the weekly so formation of an important low is a low probability scenario. A pullback however is viewed as likely and resistance is at 9667>. The bearish bias is valid as long as price is below the latest pivot of 9974.
US Dollar / Canadian Dollar Valuation Forecast
USDCAD Valuation Forecast: Bullish
USDCAD drifted further into undervalued territory in March, with prices now 19.7 percent removed from the PPP-implied exchange rate. The pace of the recovery in the US – the destination for over 80 percent of Canada’s exports – is the key driver over the near term. Continued improvement on that front coupled with an inflation rate nudging closer to the upper edge of the target band at 3 percent are seemingly supportive of further USDCAD downside. With that in mind, this story has been largely unchanged for months, hinting a good deal of it is already reflected in the exchange rate. Meanwhile, the hawkish shift in US Federal Reserve rhetoric presents a definitively new element to the equation, hinting a correction higher may be in order.
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.