Canadian Dollar: Has Market Pricing Gone Too Far Despite Hike Bets? – BBH

USD/CAD is trading close to a one-month low as expectations of a Bank of Canada (BoC) rate increase strengthen, according to Brown Brothers Harriman’s Elias Haddad. Swaps indicate a 78% probability of a 25 bps hike to 2.50% on October 28. Although headline Consumer Price Index (CPI) inflation has edged higher and inflation expectations have firmed, Haddad considers the 100 bps of tightening priced in over the coming year excessive, leaving limited scope for Canadian Dollar (CAD) gains.

Can BoC Rate Expectations Sustain Canadian Dollar Gains?

"USD/CAD is down near a one month low as markets firmed up bets of a BOC rate hike next week. The modest lift innear-term inflation expectations outweighed Canada’s soft September CPI print. The swaps curve now pricing in 78% probability of a 25bps BOC rate hike to 2.50% on October 28, up from 60%."

"Canada headline CPI rose to 3.1% y/y vs. 3.0% in August, driven by higher energy prices. That was less than consensus of 3.2% but above the BoC’s 2.5% Q3 projection. Underlying inflation was more subdued. Core CPI ex. food & energy matched consensus at 2.1% y/y vs. 2.1% in August, while the average of CPI trim and median unexpectedly eased to 1.85% y/y (consensus: 1.95%) vs. 1.95% in August, tracking below the BoC’s 2.0% Q3 projection."

"Nevertheless, the pick-up in firm’s one- and two-year inflation expectations underscore BoC Governor Tiff Macklem’s warning on Friday that “the risk that inflation broadens and becomes more persistent has gone up.”"

"We still see the 100bps of BoC tightening priced over the next twelve months as excessive, limiting CAD upside. Canada core inflation remains near the banks’ 2% target, and the economy continues to operate below capacity."

(An editor reviewed this article, which was produced with assistance from an Artificial Intelligence tool. Find out more.)