Canadian Dollar: Rate expectations cap gains against US Dollar – BBH

Brown Brothers Harriman’s Elias Haddad (BBH) expects the Bank of Canada to keep its policy rate at 2.25% and maintain two-way optionality, as contained inflation allows an extended pause. While swaps price more than 50 bps of hikes, the bank sees scope for these bets to be pared back, highlighting upside levels in USD/CAD if resistance breaks.

BOC pause contrasts with market pricing

"The Bank of Canada (BoC) is widely expected to keep the policy rate on hold at 2.25% for a fifth straight meeting (Wednesday)."

"BoC is also poised to stick to its two-way policy optionality introduced in April that new US trade restrictions on Canada would argue for cuts, but persistently high energy prices could warrant “consecutive increases in the policy rate.”"

"The swaps curve more than fully price-in 50bps of rate hikes over the next twelve months. "

"There is room for BoC rate hikes bets to adjust lower against CAD. USD/CAD immediate resistance is offered at 1.3967 (March 31 high). If this level gives way, the next target is the November 2025 high around 1.4140."

"In our view, Canada’s contained inflation backdrop gives the BoC scope to keep rates on hold for an extended period and assess whether the rebound in May employment and April real GDP is sustained."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)