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USDCAD: US Dollar Canadian Dollar Exchange Rate Forecast

By , Sr. Technical Strategist , , Quantitative Strategist  and , Currency Strategist
07 December 2011 06:36 GMT

US Dollar / Canadian DollarTechnical Forecast

Monthly Chart

USDCAD_US_Dollar_Canadian_Dollar_Exchange_Rate_Forecast_body_usdcad.png, USDCAD: US Dollar Canadian Dollar Exchange Rate Forecast

Prepared by Jamie Saettele, CMT

A well defined channel has characterized the trend since August and price has reached that channel this morning before reversing sharply. Quite simply, the series of higher highs and higher lows (definition of an uptrend) is intact above the October low of 9890. Furthermore, do not dismiss the long term potential inverse head and shoulders pattern (underway since April 2010) as long as price is above 9890. A drop below exposes 9725. Resistance is 10255.

US Dollar / Canadian DollarInterest Rate Forecast

Currency, Central Bank

US Dollar, US Federal Reserve

Canadian Dollar, Bank of Canada

Net USDCAD Spread

Signal

1-Year Expectations(Basis Points)

5

1

4

Bullish

Yield in 1 Year(Percent)

0.30

1.01

(0.71)

Bearish

USDCAD_US_Dollar_Canadian_Dollar_Exchange_Rate_Forecast_body_Picture_6.png, USDCAD: US Dollar Canadian Dollar Exchange Rate Forecast

US Dollar / Canadian Dollar Interest Rate Trading Bias: Neutral

Canadian and US interest rate forecasts have remained roughly unchanged through the past several months, giving little reason to take a strong yield-based bias on the USDCAD pair. The Canadian Dollar has proven far more sensitive to shifts in the Dow Jones Industrial Average and global commodity prices.

According to our correlation studies, the short-term link between the NYMEX WTI Crude oil contract and the USDCAD trades near record strength.

A recent Bank of Canada interest rate announcement suggests that Canadian interest rates will remained unchanged, and the Federal Reserve is similarly unlikely to move rates. Thus USDCAD traders would likely do better in tracking crude oil and broader commodity markets as they trade the Canadian currency.

View a guide on trading currencies using interest rate expectations.

US Dollar / Canadian Dollar Valuation Forecast

USDCAD Valuation Forecast: Bullish

USDCAD_US_Dollar_Canadian_Dollar_Exchange_Rate_Forecast_body_Picture_7.png, USDCAD: US Dollar Canadian Dollar Exchange Rate Forecast

Source: Bloomberg

The disparity between USDCAD spot and PPP-implied exchange rates has narrowed from the extremes but remains significant at over 1800 pips. While a steadily improving US economy will eventually give the Canadian Dollar an edge over the currencies of other commodity-producing countries where demand is tied to China and Europe, both of which are expected to decelerate through 2013, BOC rate hike expectations have yet to start reflecting that trend. In the meantime, the intimate correlation between the Loonie and the S&P 500 suggest risk trends remain firmly in control, pointing to USDCAD gains as Eurozone debt fears and the broadly slowing global recovery weigh on risk appetite.

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.

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07 December 2011 06:36 GMT