The research team at BBH suggests that the Bank of Canada will leave rates on hold as the economy has generally evolved as it has expected.
“There is little reason to abandon its cautious posture. The risks from trade are significant. NAFTA negotiations begin in a few months. Although the White House has balked at the border adjustment tax, the vacuous nature of the Administration’s budget gives breathing space to the ongoing efforts in Congress to keep it alive. The Canadian economy has accelerated faster than the US, but the output gap is only slowly closing, and a rate hike seems unlikely over the next few quarters, at least.”
“The Canadian dollar staged a key reversal on May 5, after the US dollar almost reached CAD1.38. Since then, the US dollar has fallen about 2.5% against the Canadian dollar to hit almost CAD1.3455 yesterday. The speculative market is leaning the other way, as non-commercial accounts have a record gross short CAD position in the futures market as of a week ago. With US dollar resistance seen around CAD1.3550, there is potential toward CAD1.3440, which corresponds to a 61.8% retracement of the greenback’s rally that began in mid-April.”
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