original content:
Next week, the Bank of Canada will hold its monetary policy meeting. The market consensus is for an increase in the base interest rate to 3.25%. Analysts at TD Securities expect the Bank of Canada to raise rates by 75 basis points, entering tightening territory. They see little incentive for smaller hikes as the CPI is well above target and the economy has excess demand. The BoC message will be the biggest source of uncertainty; we expect the Bank to emphasize that rates are now restrictive and signal that future hikes will be more modest in size.
Key quotes:
“The economic situation clearly calls for tightening policy rates, and we see a clear path for the BoC to hike 75 basis points in September. However, we expect the pace of tightening to slow in October, which could imply some moderation in the Bank’s forward-looking language in the September release.”
“Ahead of the BoC, we note that USDCAD has started to get ahead of the global factors we follow for the pair. Our tools peg USDCAD around 1.30. In turn, although we could see some action above 1.32 in the near term , we prefer to fade those rallies given the divergence in risk sentiment and other drivers.”
“The market is pricing a final interest rate for this hike cycle at around 3.875%; we see fair value closer to 3.65%, taking into account our 3.5% price for the final rate and the probability above 3.5% (where we see risks to our forecast), a final price of 4% would give us substantial conviction to fade.
Source: Fx Street
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