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Canadian Dollar Is Undervalued, but A $ 0.60 Loonie Would Require Severe Shocks, TD Says

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A move to $0.60 for the Canadian dollar would require a combination of severe shocks, rather than simply another period of market weakness, according to TD Economics in a note Wednesday.

The bank's fair-value model puts the Canadian dollar closer to $0.73, versus around $0.715 currently, suggesting the loonie is modestly undervalued.

TD's scenario analysis puts CAD/USD in a roughly $0.69 to $0.74 range over the next 18 months, while the bank's baseline forecast sees the loonie reaching $0.75 by the end of 2028, assuming the Federal Reserve starts cutting rates next year.

"Getting to US$0.60 -- a nearly 20% decline from today -- would require more than a normal forecast miss or another period of market unease," wrote TD in the note. "It would take several adverse shocks at once."

It would likely take a sharp and sustained decline in commodity prices, a much wider Canada-US growth gap and a significant rise in bond-market volatility, added the bank.

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