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