[B]USDCAD Monthly Technical Forecast[/B]
The market has been consolidating in a bullish fashion since the surge to 1.3020 back in October 2008, with a very broad range now being loosely defined in the 1.1500-1.3000 area. Longer-term studies still show plenty of room for upside over the coming months and as such, we favor buying on any dips towards 1.1500, by the bottom of the range, in anticipation of some significant upside back above the recent trend and 2009 highs at 1.3065. Key levels to watch over the coming weeks come in by 1.2270 and 1.1500.
[B]
USDCAD Fundamental Outlook/Interest Rate Forecast[/B]
A surprise Bank of Canada interest rate cut recently sent the Canadian dollar immediately lower versus its US namesake, but more recent price action suggests interest rate forecasts will have little effect on the USD/CAD through the foreseeable future. The Bank of Canada’s benchmark rate now stands at a paltry 0.25 percent—its effective floor—and BoC officials made clear that rates would remain low for a long time. That leaves the Canadian Dollar effectively even with the US Dollar as far as rates are concerned, and other factors will prove far more influential as far as USD/CAD price action is concerned.
Indeed, the USD/CAD correlation to Crude Oil stands at its strongest in at least 25 years—strongly suggesting that the Canadian Dollar will likely follow crude’s trajectory through near-term trade. The specter of Bank of Canada Quantitative Easing announcements could likewise force substantial USD/CAD volatility, but such action does not seem imminent.
[B]
US Dollar – Canadian Dollar Valuation Forecast[/B]
USDCAD now stands within a hair of its “fair” exchange rate having reversed course as the US Dollar sold off and crude oil rallied on a broad rebound in risky assets. Looking ahead, the outlook becomes unclear as the eventual global rebound brings two opposing forces into play. First, the US seems almost certain to precede Canada in raising interest rates, seemingly boding well for the greenback at the expense of its northern cousin. However, a return to economic growth will also boost the demand for commodities, helping oil higher and catalyzing the Loonie. Indeed, the inverse correlation between USDCAD and crude now stands at a healthy -89.6%. Regardless, the pair does not present a value disparity that is worth exploiting at the moment, so from this perspective the prudent thing looks to be to wait for price action to decide the inevitable direction of a breakout.
[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 pairs that are undervalued against their PPP exchange rate have the size of the value gap denoted in [U][B]RED[/B][/U], while those that are overvalued are denoted in [U][B]GREEN[/B][/U].