US Dollar / Canadian Dollar Monthly Technical Forecast
Although the market has undergone some steep setbacks since the
onset of 2009, we contend that the longer-term structure from here is
quite bullish, with the current consolidation in the 1.0500-1.1000 area
to eventually come to an end with acceleration back to the upside and
towards 1.2000. A longer-term higher low is now in the process of
taking form above the historic lows by 0.9000 from 2007, and we do not
see any additional weakness much below 1.0500. Ultimately, only a
weekly close below 1.0500 would give reason for concern.
US Dollar / Canadian Dollar Interest Rate Forecast
The US Dollar/Canadian Dollar has started to see yield expectations
grow in importance but still have little influence on overall price
direction for the pair. Expectedly, the spread between the two remains
very low at 18 bps with the Canadian economy so closely tied to the
U.S. Additionally, the BoC continues to reaffirm their commitment not
to raise rates until at the earliest mid-2010 unless inflationary
prices rise. Therefore, traders should keep their eye on the CPI report
which is release on October 16th.
The BoC has joined other central banks in their concern over current
greenback weakness and its implications for their local economies. The
USD/CAD has been relatively range bound over the past month but strong
housing and manufacturing data has fueled “loonie” strength. Governor
Carney will most likely try and temper growth expectations with the
prevailing concerns over the local currency’s appreciation.
US Dollar / Canadian Dollar Valuation Forecast
Canada’s rock-bottom interest rates and a fairly muted interest rate
outlook have seen the currency underperform the remainder of the
currency bloc against the US Dollar. While performance has been a bit
mixed through the third quarter, momentum seems to favor the bulls as
gains have been far more robust than losses over the past three months.
On balance, the outlook for risky assets (and oil in particular) seems
to be the key ingredient in shaping prince action, with any meaningful
weakness in capital markets’ confidence likely to produce a correction
of the close to 1270-pip undervaluation gap.
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.
Written by Joel Kruger, Technical Currency Strategist; John
Rivera, Currency Analyst; Ilya Spivak, Currency Analyst for DailyFX.com