UBS:
The Bank of Canada is being more hawkish than expected and says it will bring QE to an end. The central bank says economic slack will be absorbed by middle of 2022 (prior was late '22)/ it will move to the reinvestment phase and accelerate the potential timing of rate hikes.
The BoCs guidance is that it will not raise rates until the recovery is complete. So the line that slack will all be taken in by mid rather than late 2022 effectively brings rate timing forward. Note that the 2-year has shot up an instant 12bp on that to 1.008%.
The BoC said that inflation will be above the top of its control range for longer than previously thought, and upside risks remain. But at the same time it has cut its 2021 and 2022 growth forecasts on the back of severe supply chain problems.
The BoC now sees 2021 GDP at 5.6% rather than the 6.6% it forecast in July. It sees 2022 GDP at 3.9% rather than 5.1%.
Front-end market is currently pricing more than six BoC rates hikes by the end of 2022. That seems a bit aggressive.
TD:
In today's highly anticipated decision, the Bank of Canada changed up the script. It pulled forward the timing of when it expected the output gap to close to the middle quarters of next year as it judged that supply disruptions were weighing more heavily on the economy's productive capacity. So, even as the GDP forecast was revised down in this MPR, the output gap closed sooner than what the Bank had projected in July.
In terms of our own view, we expect the Bank will raise rates three times next year, taking the overnight rate to 1% by the end of 2022. Inflation is heating up, and it would be prudent to remove some monetary stimulus as the economy continues down the road to recovery.
That being said, we must acknowledge that there is significant uncertainty around the economic outlook right now. A resurgence of the pandemic could result in greater stimulus, but if there is a faster-than-expected acceleration in household spending, the Bank could raise rates at a faster clip. The Bank of Canada is showing that it is nimble and will react quickly to the evolving economic landscape.
ING:
We had been looking for two 25bp rates hikes in the second half of 2022, but with three hikes fully priced before today's hawkish shift in commentary, we are going to have to adjust our forecast. Significantly, employment is already at an all-time high, with 900 more people in work in September 2021 than in February 2020 while business surveys suggest a strong appetite to continue hiring. The problem is finding suitable staff.
In an environment of vibrant demand, this runs the risk that wage inflation builds and contributes to more prolonged price inflation in the economy. Consequently, the risks appear to be increasingly skewed towards the Bank of Canada hiking interest rates by a full percentage point in 2022.
USD/CAD dropped sharply following the BoC announcement, as the combination of ending QE and bringing forward the timing for a hike to “sometime in the middle quarters of 2022” pushed tightening expectations significantly higher. At the time of writing, the implied probability of a January 25bp rate hike is around 80%, with five rate hikes in total priced in for the next 12 months.
We doubt rate expectations can reasonably get more hawkish than this, but the Canadian dollar has now clearly cemented its role as a very attractive bullish bet, standing on the good side of the energy story and counting on an imminent tightening cycle. We’ll be monitoring positioning indicators closely to see whether the loonie is seeing some overcrowding of speculative buyers.
Looking at CAD’s outlook for the rest of 2021, our view is that we’d likely need to see some deterioration in market sentiment or witness a correction in oil prices for USD/CAD to stage a sustained rebound. That’s because we do not expect the forthcoming data-flow in Canada to be detrimental to the loonie or to cause a significant re-pricing of rate expectations.
We are currently targeting 1.23 in USD/CAD as a year-end forecast, but given the faster-than-expected move by the BoC and seasonal USD weakness in December, we see downside risks (i.e. USD/CAD closer to 1.20) to our scenario.
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