The rates market is barely pricing in any probability of BoC easing, a major disconnect given still low energy prices and signs of manufacturing turning over, notes Morgan Stanley.
"In short, we have a difficult time seeing how Canada will muster sustainable growth over the medium term, especially with an over-levered housing market and the knock-on effects of lower terms of trade yet to fully filter through to employment, wages and spending. With the Fed set to begin a tightening cycle in December, we think the BoC may well move in the other direction," MS argues.
MS maintains a long USD/CAD position in its strategic portfolio from around 1.3287, with a stop at 1.3050, and a target at 1.40.
"The key risk to this trade is a surge in oil prices which would help CAD sentiment near-term," MS adds.
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