cad fundamentals

US Dollar Canadian Dollar Exchange Rate Forecast

Tuesday, 07 July 2009 05:55:07 GMT  |  Joel Kruger, Technical Currency Strategist; David Rodriguez, Quantitative Strategist; Ilya Spivak, Currency Analyst

US Dollar / Canadian Dollar Monthly Technical Forecast



Continues with the recovery from the 2009 lows posted by 1.0785 on June 1, reaching 1.1655 thus far ahead of the latest minor setbacks. However, any setbacks are seen well supported ahead of 1.1330 with the market putting in yet another positive weekly close of higher highs and higher lows. Look for additional upside over the coming weeks back towards the 1.1800 area which acts as a previous support from January 2009, now turned resistance. From there, we will need to reassess the prospect for continued appreciation well into the 1.2000’s or a bearish resumption.


US Dollar / Canadian Dollar Interest Rate Forecast



The US Dollar/Canadian Dollar exchange rate has shown very little sensitivity to interest rate forecasts on a short-term basis, but it is interesting to note that broader USDCAD moves have generally followed shifts in yield expectations. The Bank of Canada made it quite clear that it would leave interest rates unchanged through much of 2010, and the Canadian Dollar showed little reaction to said news. Yet we look to the time of the release, and the USDCAD set a noteworthy bottom just a day before and rallied significantly through following trade.

Overnight Index Swaps currently show that US Dollar yields will grow by 74 basis points over their Canadian counterparts in 12 months’ time—an arguably bullish sign for the USDCAD. Of course, we will need to wait and see whether future central bank rhetoric will force major shifts in said predictions—producing commensurate moves in the USDCAD.


US Dollar / Canadian Dollar Valuation Forecast



The past month has seen USDCAD retraced higher after the pair dropped sharply lower following an impressive rally in crude oil and other commodities. Continued upward momentum is likely if assets confirm cues of a looming bearish reversal, with a valuation gap of 448 pips yet to be filled. Notably, a bullish run may extend substantially beyond closing the current disparity between spot and PPP, with the US almost certain to precede Canada in raising interest rates. Indeed, Canada’s close trade links with the States all but necessitate that the US economic recovery materializes as a precondition for a return to healthy growth.

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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