Economic research firm, Global Insight Inc., argues that the Canadian dollar is currently undervalued as the market has been slow to adjust to the new oil price environment.

“With the price of oil recently being revised upwards, and the other fundamental determinants of the dollar either supporting appreciation or neutral, we believe the Canadian dollar is undervalued,” the firm says in a research note.

It notes that since reaching par with the U.S. dollar, the loonie has not followed the surging price of oil. The price per barrel of West Texas Intermediate crude oil has increased from $95 in November 2007 to the $140 level in early July 2008, yet, it points out that the Canadian dollar, “which was slightly above par when oil was at $95 in November, has been slightly below par for most of the eight months since.”

One possible reason why the Canadian dollar hasn’t responded to the higher oil price is that it’s assumed to be a temporary spike, it suggests. Also, many other factors can affect the Canadian dollar’s value, including: other commodity export prices, the Canada/U.S. interest rate gap, and the view of international financial markets generally on the U.S. dollar.

However, Global Insight says that its review, “of the prime candidates that might be expected to explain why the Canadian dollar has not responded to the surging price of oil since last November has failed to identify any culprits.”

“There are many possible explanations — political and/or economic, as is always the case with exchange rates. The most likely reason, however, is that the rise was originally expected to be temporary. Instead, oil price forecasts have been steadily and sharply revised upwards since last November and now Global Insight does not expect the price of oil to fall below $95 until 2012,” it says.

“Thus, as is sometimes the case in empirical economic relationships, the response in the marketplace is taking a little longer than normal. With the price of oil recently being revised upwards, and the other fundamental determinants of the dollar either supporting appreciation or neutral, we believe the Canadian dollar, currently in the par range to the U.S. dollar, is undervalued,” it concludes.