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Three Reasons the Canadian Dollar is Priced Just Right


Sentiment — Risk Reversals

Risk reversals on the Canadian Dollar are right around their average level for the last 12 months at negative 0.80 (quoted in vol terms). Translation: the options market is pricing the relative value of out of the money puts and calls of the same maturity such that there is no significant divergence between current prices and option market expectations. 

Producer Purchasing Power Parity

Our currency is priced right where it should be relative to Producer PPP.  For more on this, see our previous posting here

Bank of Canada’s Lack of Options

While Governor Poloz’s Bank of Canada would probably prefer a lower Canadian Dollar, he is limited in what he can do to get there given that interest rates are already near zero and the negative consequences on the other sectors of the economy of trying to move rates further down.

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