The Canadian dollar looks ‘egregiously’ undervalued: Scotiabank

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Canada’s dollar is “egregiously” undervalued, Scotiabank said following a report Friday that showed record job gains for the country.

While the loonie has had a bad reputation of late, the strength of the nation’s economic fundamentals reinforces the view that the currency should be stronger, foreign-exchange strategists Shaun Osborne and Eric Theoret wrote in a note.

The Canadian currency climbed as much as 0.7 per cent to $1.3381 per dollar on Friday, its strongest level in a week, after data showed the country added an above-forecast 106,500 jobs in April. The yield premium of two-year U.S. notes over equivalent Canadian securities continued to shrink on Friday, dropping to around 62 basis points from more than 70 earlier in the week.

Shifts in interest-rate differentials between the two countries “should drive additional gains for the currency moving forward, all else remaining equal,” the Scotiabank strategists wrote.

The increase in jobs was the biggest one-month increase for payrolls in data going back to 1976, and far exceeded the 12,000 anticipated by economists. The moves in markets were also helped by weaker-than-expected U.S. inflation data, which weighed on the greenback and U.S. Treasury yields, and concern about the Chinese-American trade relationship.

Meanwhile, the price of West Texas crude oil — the global benchmark for one of Canada’s key products — continued to hover around US$62 a barrel, having climbed more than 36 per cent this year.

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

On the domestic front, the strategists say that the economy appears “in way better shape” than the Bank of Canada had expected in its recent monetary policy report.

“If this year’s CAD ‘flight path’ is really mimicking 2017, the USD peaked over the past week and is poised to fall sharply,” the Scotiabank strategists wrote.

Bloomberg.com

Source: Financial Post

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