Living in Canada and taking a course on FX exchange had caused me to take a look at the CAD. While I have not been able to complete a full analysis on the CAD, it appears to be substantially overvalued for a number of reasons. Most notably:
-decreases in GDP projected due to fall in commodity prices (Metals in particular, with a fall in oil possible as well in the foreseeable future due to increases in supply)
-PPP has Canadian dollar overvalued. Big Mac Index for 2013 shows CAD overvalued by close to 20% and the arguments against the Big Mac index are not valid when comparing the US to Canada.
-Support is barely holding. If the .97 level is broken, I see significant downside risk
In looking at the big picture, it makes sense for the CAD to trade in parity with the USD when the US is in a recession and commodity prices are spiking. However, the US recovery is looking quite strong and commodity prices are plunging. While Canada could benefit as a large exporter to the US, the plunge in commodity prices could cause decreases in GDP, Current Accounts and Capital Accounts. This should outweigh any benefit Canada could gain from the US recovery.
Also there are a number of catalysts in the works which could cause the US Dollar to surge. Including: Tapering off of QE3, US growth beginning to heat up, eventual rise of interest rates. All of these catalysts seem to put pressure on the CAD.
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Good post! I agree that there could be a depreciation in the CAD but PPP could be one of the reasons it doesn’t decrease if inflation in the US picks up after all the easing that’s been going on.
Hey Mike, thanks for the comment. I think that there is an extreme lack of PPP with the CAD (notice all of the people that go across the border to the US to do their shopping). This has got to balance out eventually~