[B]USDCAD Monthly Technical Forecast[/B]
The market has been in the process of mounting a significant rally out from the historic lows set by 0.9060 in November 2007. It now appears that a fresh higher low is in place by 1.1465 (November 2008 low) to be confirmed on a break back above 1.3020. The late February break of a multi-week triangle pattern strengthens constructive outlook with the breach of triangle resistance now projecting a measured move objective over the coming months back to challenge the 1.4000, 2004 highs. We would however recommend that longer-term bulls proceed with caution, with the monthly RSI now crossing above 70.
[B]
USDCAD Fundamental Outlook/Interest Rate Forecast[/B]
The Bank of Canada lowered its benchmark rate to 0.50% which erased any yield advantage that it had over the Fed Funds rate. An aggressive statement following the rate decision has markets expecting another 40 bps worth of easing from the central bank. As expectations for the Fed Funds Rate remain plus 41, the spread continued to indicate bullish USD/CAD sentiment.
Although further easing is generating a bullish bias, recent price action indicates that the relationship between interest rate expectations and price action has faded. However, we do expect the relationship between commodity prices in particular oil will continue to hold its influence over the Canadian dollar.
[B]
US Dollar – Canadian Dollar Valuation Forecast[/B]
The Canadian dollar was the second-worst performing currency against the greenback in February, and the exchange rate is likely to push higher next month as the Bank of Canada lowers their growth forecasts for the year. Despite the extraordinary efforts taken on by policy makers, comments by BoC Governor Mark Carney following the March rate decision suggests that the central bank will adopt a zero interest rate policy over the near-term as the economic downturn intensifies. As a result, we are likely to see the USDCAD continue to push higher in the weeks ahead, and expect the loonie to remain as one of the most undervalued currency against the greenback going forward.
[B]
What is Purchasing Power Parity?[/B]
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. Currencies overvalued against the Dollar are denoted in [B][U]RED[/U][/B], while those that are undervalued are denoted in [B][U]GREEN[/U][/B].