[B]US Dollar / Canadian Dollar Monthly Technical Forecast[/B]
5 waves up from the 2007 low ended at 1.3068 and the USDCAD has fallen sharply since. Second waves often retrace 61.8% of wave 1, which rests at 1.0588 for the USDCAD. Be on the lookout for support near that level.
[B]US Dollar / Canadian Dollar 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]
[B]USDCAD Valuation Forecast: [/B][B]Bullish[/B]
The past month has seen USDCAD drop sharply lower following an impressive rally in crude oil and other commodities, sending the pair 1160 pips below its “fair” exchange rate. Looking ahead, the US seems almost certain to precede Canada in raising interest rates, boding well for the greenback at the expense of its northern cousin. Indeed, Canada’s close trade links with the States all but necessitate that the US rebounds as a precondition for a return to healthy economic growth. That said, the rebound in risky assets is yet to find a confirmed top so the pair may yet push lower, making for a more attractive buying opportunity in the months ahead.
[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.