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US Dollar / Canadian DollarMonthly Technical Forecast

Weekly Chart

US_Dollar_Canadian_Dollar_Exchange_Rate_Forecast_body_usdcad.png, US Dollar Canadian Dollar Exchange Rate Forecast

Prepared by Jamie Saettele

The USDCAD is trading just off of multi year lows. The 13 week average continues to hold as resistance thus the downside must be respected. Focus is on the downward sloping trendline drawn off of the August and October lows as well as 9710 (February 2008 low). 10057 is the 2011 high and serves as the directional pivot. Trading above there would also indicate a break of short term trendline resistance. Still, bulls would not be in the clear until a break above 10373.

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)

45

83

(38)

Bearish

Yield in 1 Year(Percent)

0.70

1.83

(1.13)

Bearish

US_Dollar_Canadian_Dollar_Exchange_Rate_Forecast_body_Picture_2.png, US Dollar Canadian Dollar Exchange Rate Forecast

The US Dollar/Canadian Dollar pair has traded independently of yield forecasts for some time now, and we expect this may continue to be the case as the commodity currency reacts to shifts in raw materials prices. Crude oil futures have surged amidst geopolitical tensions in the Middle East. And though the Canadian Dollar’s correlation to benchmark oil prices has weakened as of late, we would expect the USDCAD to remain under pressure on continued rallies in energy commodities.

Currently modest rate expectations for both the Bank of Canada and US Federal Reserve suggest it will take a noteworthy shift in rhetoric to move the USDCAD through the foreseeable future.

US Dollar / Canadian Dollar Valuation Forecast

USDCAD Valuation Forecast: Neutral

US_Dollar_Canadian_Dollar_Exchange_Rate_Forecast_body_02092011_CAD.png, US Dollar Canadian Dollar Exchange Rate Forecast

USDCAD drifted further into undervalued territory in January, with prices now 17.6 percent removed from their PPP-implied fair 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, as evidenced by the burgeoning correlation between USDCAD and the S&P 500. With US economic data looking increasingly encouraging and the inflation rate nudging closer to the upper edge of the target band at 3 percent, a further widening of the value disparity seems likely as rate hike expectations mount. However, policymakers have loudly bemoaned the pain inflicted by the stronger currency, hinting that the Bank of Canada will hold out as long as possible before making a move toward tightening. Authorities may even consider intervention, considering it would not be the first time the BOC has stepped into the markets to advance their agenda. On balance, the purely valuation-based implications of current positioning point to a bullish bias but the landscape seems clouded and a position on the sidelines seems prudent.

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.