Dollar Bloc Currencies - Canadian Dollar
The CAD has turned in another strong performance in the past few days and is once again the strongest performing major currency over the past five trading sessions.
While the domestic fundamental news over the past week or so has hardly been positive, the CAD has been able to shrug off a poor employment report and
flat-lining oil prices. The quantitative research suggests that the CAD is overvalued but the misalignment is relatively small at present and certainly no hindrance to further modest CAD appreciation.
Fundamental prospects may not be all that attractive at home, but they remain relatively worse abroad – the primary reason for a more positive assessment of the CAD’s prospects against the USD in the past few months. While the Bank of Canada (BoC) seems very likely to trim interest rates to near zero next Tuesday, the central bank appears in no rush at the moment to go beyond that. Domestic credit conditions remain tight, however, and the BoC is expected to outline a framework for nonconventional easing in next Thursday’s Monetary Policy Report; the framework will indicate how non-standard policy measures might work in Canada and should also provide some clues as to the circumstances under which the BoC would adopt these tactics. It is not entirely clear that any additional policy measures will seriously undermine the CAD at the moment; such policy moves may focus on credit, as opposed to “quantitative”, easing and even if it does come to “printing money” in Canada, analysts expect the overall scale to be relatively smaller than the USD300bn in quantitative easing that the Fed is currently committed to.
In short, analysts think the CAD is roughly fairly valued and relative fundamentals are perhaps less onerous for the CAD than the broader market has assumed. In fact, the latest leg up in the CAD has probably been boosted by poor market
positioning (increasingly short CAD in the past few weeks). With USD/CAD failing to drive through the recent range highs (around 1.30) in the past few weeks, the main directional risk is now towards the low end of the recent trading range around 1.1760 (at least).
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