[Pimpllus]

Just two months ago USD/CAD was pushing the overvalued limits as it traded towards 1.30. Now, after having plummeted 18 big figures, USD/CAD is close to being considered undervalued. The modelled fair value range has fallen by almost 8 big figures to 1.10 -1.22 during the last two months, mainly driven by the improvements in crude oil and base metals prices and, a general improvement in risk sentiment. But the downtrend in USD/CAD is expected to run out of steam as the currency falls toward 1.10.

CAD has benefited alongside other commodity and cyclically sensitive currencies in recent weeks, but Canada’s exposure to China remains indirect through commodity prices. Canadian financial markets and trade remain heavily weighted to the US, which still might pose a speed limit to CAD and poses a downside risk to CAD should the US economy stumble further, as seems distinctly possible. True, Canada’s exports are less dependent on the US and China has been increasing in importance. But the US still accounts for over 75% of Canadian exports, dwarfing China’s less than 2.5%.

In one of Canada’s key export sectors, energy, China is virtually non-existent as a customer. Almost 100% of Canada’s energy exports are oriented toward the US market. Canadian crude oil exports to China are erratic. In fact, Canada has not recorded any exports of oil to China since April 2008.