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Canadian Dollar Overvalued: USD/CAD Should be Around 1.11 Suggest TD Securities

Should the USD/CAD strengthen then the door is openeded for other key currencies to experience upside pressure against the CAD, the pound sterling being one of them.

Before we hear more on the matter, note the following FX levels (29/08):

  • The British pound to Canadian dollar exchange rate (GBP/CAD) is unchanged on a day-to-day basis at 1.80170.
  • The euro to Canadian dollar exchange rate (EUR/CAD) is 0.18 pct lower at 1.4295.
  • The US to Canadian dollar rate (USD/CAD) is 0.11 pct lower at 1.0849.

(NB: Keep in mind that these are spot market rates to which a discretionary spread is added by your bank/provider. An independent FX provider will however guarantee to undercut your bank's offer, in some cases delivering up to 5% more FX. Please learn more.)

Canadian Dollar Could be Overvalued Warn TD Securities

Analyst Shaun Osborne at Canada's TD Securities has told clients that his fair value regression model, utilising 5-year Canada-US spreads and Canadian terms of trade as inputs, "suggest that the CAD remains overvalued, though the 'stretch' is less egregious than in July."

TD Securities estimate a fair value currently of USD0.90, or USDCAD 1.11.

"We think spot should make more progress towards fair value in the next few weeks," says Osborne.

Tactically, the bank recommends maintaining USDCAD longs positions and utilising minor USDCAD dips to the 1.09 area to add to positions - or initiate longs for those not already long.

"We think counter-trend corrections in this market will remain shallow and short-lived. We are lifting the stop on our long recommendation to 1.0850 now and pushing the target on this trade to 1.11," says Osborne.

The Canadian and US Dollars Today

So far today the USD hs traded towards the lower end of this week’s range.  

"Long USD positioning is building up, and that is probably a factor behind yesterday’s lower close in the DXY and similar price action today.  But recent shifts in US yields have been peculiar, with short-term and belly rates moving up, but longer-term tenors in decline.  USD and EUR 5yr/5yr forward inflation swap rates have been moving lower together," says Stephen Gallo at BMO Capital.

USD/CAD has traded in a tight range coming within 3 or 4 pips of 1.0950/60 support.  

"Many of the forces acting on the pair at present are conflicting with each other.  The oil price has continued to trade without much upward momentum at all, but lower USD demand and buoyant equity prices are propping up the CAD.  Key interest rate differentials are still turning up in importance for USDCAD though, and they should be watched closely around macro economic data," says Gallo.

BMO say they are, on balance, looking for lower readings than the consensus in today’s July durables numbers as far as the headline and ex-transport numbers are concerned.  

"On August consumer confidence, however, they are slightly higher.  Given the USD’s softer tone so far this week, surprisingly weak prints will probably trigger some short-term long USD covering, but 1.0900/25 in USDCAD will remain excellent support for now and probably straight into personal income and spending data on Friday," says Gallo.