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CANADA: Hawkish Skew To Risk Around 75bp Of Cuts To Come By End-2024 [2/2]

CANADA
  • Canadian rates markets have been impressively insensitive to the gyrations in US rates after a surprisingly soft payrolls report sparked global risk-off before mostly recovering since then. 
  • BoC-dated OIS has held between 25-30bp of cuts for the Sept 4 meeting through almost all of August to date. It’s currently in the middle of this range. 
  • We think there would have to be significant CPI surprises in either direction to move materially away from this backdrop, with a September cut seemingly set in stone at this juncture. 
  • Instead, we see 75bps of cuts over Sep, Oct and Dec (for 125bp of cuts this year) as more sensitive to Tuesday’s CPI. 
  • The July minutes showed “the downside risks to inflation took on a greater importance in their deliberations than they had in prior meetings” and clearly pushed the more symmetrical profile to inflation risks. 
  • However, a willingness to take decisions one meeting at a time and prior desire for a gradual lowering of rates sees risk greater risk from a hawkish surprise as markets shift to a brief pause narrative for either the Oct or Dec meetings.  
  • Gov. Macklem’s opening statement in July: “If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate. The timing will depend on how we see these opposing forces playing out. In other words, we will be taking our monetary policy decisions one at a time".
  • To materially price in more than 25bp cuts per meeting is likely to also require a sizeable dovish surprise in GDP on Aug 30 as well as, two days after the Sep 4 BoC, the August labour report. 
  • We see similar skew to risk of a hawkish reaction in FX as well, with CFTC data suggesting CAD net shorts remain at a historically extreme 56% of open interest.  
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