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National Bank: Canadian Dollar Undervalued, Forecast to Gain in 2022

 National Bank of Canada

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National Bank of Canada says the recent decline in the value of the Canadian Dollar merely makes it even more undervalued relative to fundamentals, as they forecast gains in 2022.

The Canadian Dollar is one of 2021's better performing major currencies but the outperformance has faded lately, with losses being recorded against the Dollar, Pound, Yen and Euro over the past month.

"After a strong start to the quarter, the Canadian Dollar is now down 1% against the USD in Q4," says Stéfane Marion, Chief Economist & Strategist at National Bank's capital markets division.

But, the stars are aligned for a return to outperformance with Marion and his team finding Canadian economic growth to be robust, employment strong and public finances improving at a rapid pace.

"Quantitative easing has already ended, and inflation is high enough to warrant multiple rate hikes in 2022," says Marion.

National Bank views CAD as "fundamentally undervalued and see scope for a rally over the coming months".

But, this bullish stance assumes the Omicron Covid variant strain does not "wholly undercut investor confidence".

The variant remains a source of uncertainty to analysts who warn any adverse outcome regarding to the pandemic could turn existing expectations for currencies upside down.


NBF chart 1

  • Reference rates at publication:
    GBP to CAD spot: 1.6810
  • High street bank rates (indicative): 1.6222 - 1.6340
  • Payment specialist rates (indicative: 1.6660 - 1.6726
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National Bank's modelling finds current Canadian Dollar exchange rates reflect an oil price of just $42 a barrel, suggesting it is cheap relative to one of its most important drivers.

Their research also finds that the Canadian Dollar to be better bid in the run up to, and during the early stages of, a rate hike cycle.

One reason cited by a number of analysts we follow for CAD's recent underperformance is a fear the government will alter the Bank of Canada's (BoC) mandate in the currently underway mandate review.

The findings of the review are due this month.

Some analysts speculate the government could mandate the BoC to target employment levels in a similar manner to the Federal Reserve, but National Bank find with Canada's economy performing as well as it is this is unlikely.


NBF chart 2

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As such they see multiple rate hikes in 2022 which will support the currency.

National Bank forecasts a Pound to Canadian Dollar of 1.70 for year-end 2021, 1.70 for the end of the first quarter 2022, 1.66 for mid year and 1.70 for the end of the third quarter 2022.

USD/CAD forecasts are set at 1.26, 1.24, 1.20 and 1.22 for the above times.

EUR/CAD is forecast at 1.44, 1.44, 1.40 and 1.45 respectively.