Canadian dollar is overstretched says TD Securities; USD/CAD range capped at 0.99 say Scotiabank

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Published on Friday, 14 September 2012 12:10

Written by Sam Coventry

The Canadian dollar (Currency:CAD) is a mid-performer on the FX markets today being outshone by the likes of the euro which continues its spectacular recovery.

The spot FX rates show: The pound Canadian dollar exchange rate is unchanged on a daily basis at 1.5634.

The euro Canadian dollar exchange rate is 0.4 pct higher at 1.2632.

The US dollar to Canadian dollar rate is 0.42 pct in the red at 0.9644.

"CAD is strong, up a further 0.4% since yesterday’s strong close and is trading at a new 13‐month high. Over the next few weeks we expect USD/CAD to trade in a range of approximately 0.95 to 0.99, with yesterday’s close of 0.9685 as the midpoint," says a forecast from Scotiabank's Camilla Sutton.

A weaker USD, higher commodity prices and wider short-term interest rate spreads in the CAD’s favour are the consequences
in the immediate aftermath of the Fed decision. 

The Canada-US 2-year spread is nearing the 100bps premium, last seen in May - another factor that is clearly CAD supportive.

"But the fact that the lowest levels seen in funds in the spring was just under 0.98 suggests (once again) that the CAD’s
valuation is stretched.  The current excess can be explained by the broader discount on the USD as a consequence of the Fed’s
policy moves and its disappearing safe-haven premium," warns Shaun Osborne at TD Securities.  

That may yet return—there are still significant uncertainties facing the global economy, after all.

And higher commodities broadly confound the message of slower growth coming from most parts of the world.

The USD is lower across the board (except for the JPY) while crude prices have reached the highest level since May.

As mentioned however, it is the euro is the currency to back today:

"The Fed’s launch of QE3, the threat of QE4 combined with the ECB’s bond buying program, banking union and German assessment of the ESM have shifted the valuation for EUR dramatically. Even the threat of a Spanish re‐ quest for aid is unlikely to stir markets as the risk of a EMU breakup has decreased," says Sutton.