Krishen Rangasamy, Analyst at National Bank Financial, explains that last week we got further evidence that the Canadian economy has largely rid itself of slack.
“Excluding the volatile food and energy components, the consumer price index was up 2.3% on a year-on-year basis, the highest in 11 years. So much so that the ex-food and energy inflation differential with the U.S. has now disappeared.”
“And yet, Canadian interest rates remain unfavourable relative to those of the U.S. Just how unfavourable? Considering a near-zero inflation differential, the Canada-U.S. 2-year yield spread is the most negative we’ve seen in the last 20 years.”
“Concerns about trade have so far restrained the Bank of Canada. But should those NAFTA-related clouds dissipate, expect the central bank to step up monetary policy normalization and eat into the U.S. interest rate advantage, something that would provide a lift to the Canadian dollar.”
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