By Cedric Welsch – When we use the word parity, we are referring to something that is equal to some other thing. When referring to a Canadian dollar parity forecast therefore, we mean parity between the Canadian currency and the US dollar. We will briefly discuss the various factors that play a role when we prepare such a forecast.
The US dollar has been in a declining phase for a number of years now. We can attribute this to a variety of factors. A major reason is certainly the lackluster performance of the US economy and the lack of trust in its ability to bounce back in a short time. As the dollar continued to decline, an increasing number of investors started to lose faith in this currency, switching to the Euro and other currencies that performed better.
The Canadian dollar has been worth less than a US dollar for many years. As the US dollar went into long term decline, its Canadian counterpart began to appreciate against it in a remarkable way. The stable economy and good long term prospects in Canada of course helped a lot in this regard.
There are therefore more and more economists that nowadays predict that the Canadian and US currencies will soon reach parity. There are some optimistic experts predicting this will occur within the next few months. Others are a little more cautious in their approach and they predict it to happen in less than a year from now.
Economists use mainly 2 approaches when they attempt to make a Canadian dollar parity forecast. These are the technical approach and the fundamental approach. We will briefly look at both.
The technical approach is more often than not applied for short-term forecasting. It’s very popular with fund managers who have to make reasonably short term investment decisions. This model makes use of indicators such as trading volumes, moving averages, etc.
The fundamental approach encompasses the use of what is referred to as fundamental indicators in the industry. Economists following this approach will therefore use factors such as inflation, GDP and unemployment when drawing up their predictions. This approach is generally more useful when one tries to make long term predictions of a currency’s value.
It’s still widely debated how long it’s going to take before the US and Canadian currencies reach parity. There are, however, not many economists who predict this won’t happen. A Canadian dollar parity forecast is a very real possibility – most economists only differ about the time frame.
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