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Sverre Holbek
Senior FX Analyst
Danske Bank
We still see the Canadian Dollar playing very much on the market sentiment and we actually think that global recession fears have been priced too hard on the financial markets. Given that we look forward to decent growth from the US we consider that there still is some upside for risky assets from here. It should be a key factor that ought to additionally provide some support to the Canadian Dollar. Besides that, we know that if you have fairly strong growth in the US which is what economic data is seems to be pointing to at the moment, or at least at growth of around 2,5% over the coming year, then this is a factor that should both support the Canadian Dollar through the direct impact from the US on the Canadian economy. It should be beneficial for risky assets and therefore, in turn, also supporter of the Canadian Dollar through that channel. We assume there are stronger levels in the pipeline for the Canadian Dollar and we envisage the Dollar cap heading towards parity on the three-month horizon and then further below parity on a six to twelve-month. Therefore, our forecast is 0.98 on the six-month horizon and 0.96 on the twelve-month forecast.
Nonetheless, we still consider there is a room for threats to investors concerning the Canadian Dollar longs. We have not seen the buildup in speculative investor positioning Canadian Dollar to the same extent as we have seen in the Australian Dollar and the Kiwi. This is a factor that could point to further downside of the Dollar cap. The Dollar cap seems expensive, it is looking relatively low to our PPP model estimates, that is why we are fairly deep in overvalued territory for the Canadian Dollar. This could, perhaps limit the potential somewhat, but overall, the US economic data, risk appetite in 2012 and higher commodity prices are the factors pointing, in our view, to a lower Dollar cap. Moreover, the potential for further Fed Easing should be of effect opening up for further Dollar cap downside as well.