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VIEW: TD On BOC To Keep Open Further Tightening

CANADA
  • TD expect a 25bp hike on Wednesday for the last hike this cycle, with the odds of no move at one-in-three. However, the forward guidance is likely to leave open the possibility of additional tightening.
  • While this is expected to be the last hike, the CAD may not receive much directional bias from this meeting as the curve may continue to be biased about looking at the other side of this interest rate cycle.
  • However, CAD may be more sensitive to any dovish elements should the BOC emphasize elements from the BOS. We see a differentiated dynamic playing out on the crosses given risk correlations.
  • In rates space, Canada is due for a macro catalyst (weak Q1 data perhaps?) to really set the CAN-US trade in motion for another leg of outperformance versus the US. 5s are very rich on the curve, but we are cautious for several reasons.
  • If activity figures remain resilient through early 2023 and inflation proves stubborn, additional tightening in March and/or April is entirely possible, but we don't expect additional rate hikes will be necessary. We also believe that the market has priced entirely too much easing into the latter part of 2023, instead expecting cuts beginning in 1Q24 and will look for more details on BoC's balance sheet evolution in April or July.
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