Canadian Dollar Forecast: CAD Exchange Rate is Overvalued and Could Fall to 1.1300 vs USD

The Canadian dollar (CAD) is forecast to eventually decline against the US dollar according to two new reports from TD Securities and Lloyds Bank.

And with the pound sterling (GBP) coming under renewed buying pressure may eventually see a break higher out of the current quagmire in GBP/CAD.

At the time of writing we see the following rates:

• The pound sterling to Canadian dollar exchange rate is 0.02 pct lower than at Tuesday night's close having reached 1.8426.
• The euro to Canadian dollar exchange rate is 0.06 pct higher at 1.4726.
• The US dollar to Canadian dollar rate is 0.03 pct higher at 1.0865.

If you are holding out for better rates, or afraid of a further deterioration in the FX pair you are watching, then consider getting an independent FX firm to help set up a risk management strategy. They will also be able to deliver up to 5% more currency than your bank would typically deliver on execution.

The Canadian dollar is overvalued say analysts

The CAD is little changed against the USD, and other majors such as the GBP, over the past month with recent economic news proving to be modestly ‘loonie’ positive.

However, the latest Canadian employment report looked a little soft with part-time postings growing and full-time positions decreasing.

The recent Manpower survey showed a modest uptick in hiring intentions, the broader trend in hiring looks soft in absolute terms and relative to the steady improvement in the US.

"This may be further evidence of Canada's weaker than normal participation so far in the global rebound that the BoC finds troubling," says Shaun Osborne at TD Securities.

Osborne reckons the Canadian dollar is looking richly priced at present:

"Additionally, USD-supportive yields and the drift down in commodity prices in the past few weeks support the impression that the CAD is fundamentally over-valued at current levels.

"Spreads at the five-year sector of the curve are at their widest since 2009 and this alone suggests that the USD should be somewhat firmer in our opinion."

The TD Securities 'fair value' regression model suggests an equilibrium rate for the CAD of below USD0.89 (or nearer 1.1250 in USDCAD terms) currently, about two standard deviations from current spot values.

"We have tried – with no success – to get long USDCAD again in the past few weeks but we remain bullish on the USD outlook and will be closely monitoring price action in the next few weeks for signs of a more durable rebound in the USD that we can jump aboard," says Osborne.

Lloyds Bank Research are also forecasting the Canadian dollar to eventually come under pressure:

"The press statement following the BOCs June policy meeting suggested it is no hurry to tighten monetary policy. Indeed, the BOC would probably prefer a weaker currency to help boost exports. Given this policy stance, we see limited upside for the CAD.

"With Canadian interest rates not expected to rise before those in the US, the CAD is expected to depreciate against the USD. We forecast USD/CAD at 1.13 at end 2014."

Weekend news snapshot

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‘We must focus on fast growing areas and where we can increase our market share’: The ex-BT Chief now leading Britain’s battle to boost trade says firms must go for growth overseas.