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VIEW: BofA Expect Downshift To 50bp But A Tight Call

CANADA
  • Now below a narrow consensus, BofA look for the BoC to slow down its hiking pace with a 50bp hike but see relatively high risks are skewed to 75bps.
  • The nominal rate is already above neutral and there are risks of tightening too fast, however, the Fed is still hiking in 75bp clips and the real ex-ante rate in Canada is still low. As such they see a terminal rate of 4.5% in 2023.
  • An actual delivery of a BoC downshift will allow CAD rates to continue to outperform the US. The current terminal spread of ~50bp (4.37% vs 4.9%) could widen to 75bp as the Fed becomes increasingly concerned with labor market strength and the Canadian labor market continues to soften.
  • USDCAD appears overbought in Sept due to the Aug inflation surprise and broad risk-off sentiment. Look to fade any USDCAD fade above 1.39, keeping our year-end forecast at 1.36.
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