cad fundamentals

US Dollar Canadian Dollar Exchange Rate Forecast

Wednesday, 03 June 2009 10:03:39 GMT  |  Jamie Saettele, Senior Currency Strategist; John Rivera, Currency Analyst; Ilya Spivak, Currency Analyst

US Dollar / Canadian Dollar Monthly Technical Forecast



5 waves up from the 2007 low ended at 1.3068 and the USDCAD has fallen sharply since. Second waves often retrace 61.8% of wave 1, which rests at 1.0588 for the USDCAD. Be on the lookout for support near that level.


US Dollar / Canadian Dollar Interest Rate Forecast




The Bank of Canada announced that it would keep its interest rate at 0.25% until the second quarter 2010 which should ostensibly remove the impact of interest rate expectations on price action. However, we have seen Credit Suisse overnight index swaps price in 15 bps of a rate increase. The one caveat that the central bank made when issuing the pledge was that it was conditional on the inflation outlook. Considering that central banks across the globe are printing money and commodity prices continuing to charge higher, the relationship deserves watching.

The main driver of recent “loonie” strength has been soaring oil prices which have reached above $68 bbl on the improving outlook for the global economy. Many exports are forecasting oil to reach as high as $80-$90 bbl which could lead to further weakness for the USD/CAD.


US Dollar / Canadian Dollar Valuation Forecast

USDCAD Valuation Forecast: Bullish



The past month has seen USDCAD drop sharply lower following an impressive rally in crude oil and other commodities, sending the pair 1160 pips below its “fair” exchange rate. Looking ahead, the US seems almost certain to precede Canada in raising interest rates, boding well for the greenback at the expense of its northern cousin. Indeed, Canada’s close trade links with the States all but necessitate that the US rebounds as a precondition for a return to healthy economic growth. That said, the rebound in risky assets is yet to find a confirmed top so the pair may yet push lower, making for a more attractive buying opportunity in the months ahead.

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 the Organization for Economic Cooperation and Development (OECD). 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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