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BofA Maintain Aggressive Rate Call, Support For CAD

CANADA
  • BofA continue to expect the BoC to hike 50bp in June and in July, and then in 25bp clips at each meeting to reach a terminal rate of 3.50% in April 2023, above the neutral 2-3% range.
  • A number of factors support this, including a forecast for the economy to grow over 4% this year, continued inflation pressures, the fact that house prices keep increasing and are at high levels compared with other countries, along with a tight labor market.
  • A 50bp hike is fully priced in, which they see "as providing a cheap option to pay for a surprise 75bp", with the recent above-consensus inflation opening the door to this possibility but a very low probability.
  • Rates: "The market continues to perceive this hiking cycle as front-loaded and subject to reversal as the business cycle matures. We see growing risks of a Fed pause later this year which might help lower US rates relative to CAD rates, but would likely lead to a global rates rally if it transpires".
  • FX: The prior push above 1.30 in USDCAD was driven by higher risk aversion and a softening in energy prices. "However, it has since moved below 1.28, and has been consistent with our overall modestly positive CAD outlook, with a year-end forecast still at 1.23. The BoC rate hikes should prove further supportive for the currency, in our view."
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