CAD: Only downside risks now is the market’s expectations for BoC hikes - ING

Viraj Patel, Research Analyst at ING suggests that after the BoC’s second consecutive rate hike this week, their economists suspect that there will be a pause in monetary policy.

Key Quotes

“We tend to agree; both the broader geopolitical uncertainties – with Canada’s main trading partner, the US, front and centre – and notable concerns over the ability for highly indebted households to absorb higher interest rates, require a ‘wait-and-see’ BoC policy approach in the near-term. Moreover, we've yet to see the economic fallout from a strong CAD; the July MPR forecasts were based on $/CAD at 1.31-1.32 and the move down to the low 1.20s should be seen as drag on the BoC's policy reaction function. In fact, these second-round disinflationary effects could well serve as a backstop to further BoC tightening.”

“We only see downside risks to the market pricing of 70bp of BoC hikes over a 1Y horizon. It’ll only take the sightless whiff of weakness (ie, signs of greater slack) in today’s Aug jobs report to see the CAD correct lower.”