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Canadian Dollar Shockingly Undervalued, Analysts Say

The Canadian dollar might be worth considerably more towards the end of this year based on research by Scotiabank analysts who describe the currency as being “egregiously” undervalued.

Posted May 11, 2019

Data on Friday that showed an employment change in Canada of +106,000 last month was enough to force USD/CAD below C$1.34 for the first time since May-1, representing as it did the best payrolls performance in more than 40 years.

Before April’s jobs report, which also showed the unemployment rate slipping to historically low levels, at 5.7 percent, USD/CAD had been threatening to break above C$1.35, and CAD forecasters had been expecting slight loonie weakness towards C$1.36 by year-end.

The Canadian dollar’s outlook appears, though, to have changed significantly for the better, with Friday’s data offering further evidence that the Canadian economy is in “way better shape” than policymakers at the Bank of Canada have until now believed, according to Scotiabank foreign exchange analysts Shaun Osborne and Eric Theoret.

As reality dawns for the Bank of Canada, interest rates will be hiked and these will drive Canadian dollar appreciation, the analysts say, particularly as the US Federal Reserve might leave its own interest rates unchanged throughout the rest of this year, shifting rate differentials in the loonie’s favour.

Though investors will point to the potential negative currency impacts from the recent escalation in US-China trade tensions, which could pressure the price of Canada’s largest export, oil, these are likely to be offset by supply shortages stemming from sanctions on Iran and Venezuela, as well as from OPEC production cuts, Osborne and Theoret believe.

“Crude oil prices remain relatively well-supported, with supply disruption worries offsetting the unhelpful trade backdrop for the global economy.”

At $70.70 per barrel at the end of last week, Brent crude was 41 percent higher than its lows from December.

All considered, Osborne and Theoret see the loonie as being “egregiously” undervalued.

As part of its own USD forecasts, Scotiabank said in late April that the greenback was now likely to be “stronger for longer,” implying that Canadian dollar appreciation might be best realized against other currencies, and any list of currencies should include the New Zealand dollar, against which Canada’s currency is trading at a healthy 6 percent discount on 2018 highs.

USDCAD at 1.2620 is near average of 1.241-1.285 range.
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