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📝Market Overestimating BoC's Propensity to Follow The Fed: RBC

The emerging divergence between the BoC and Fed that we noted last month was fully evident in the two central banks' latest policy decisions. Ahead of a widely-expected 75 by hike by the Fed, the BoC put its currency worries aside and surprised the market with a below-consensus 50 by increase (in line with our forecast). The Canadian dollar actually held its own following the decision, but GoCs rallied sharply, with 2-year yields re-cording their largest single-day decline since early-2015. That move ultimately wasn't sustained, as a hawkish Fed and strong jobs report pushed BoC terminal late pricing higher. But we think the market is overestimating the BoC's propensity to follow the Fed, particularly after it charted its own course in October. While we've lifted our terminal fed funds forecast by 25 bps (to 4.75-5.00%) our BoC call is unchanged (4.00% terminal). That end-of-cycle gap would be at the higher end of the range seen in recent tightening cycles—the Fed consistently going further—whereas market pricing is at the lower end. That suggests downside risk to the Canadian dollar, in line with our forecast for further near-term depreciation. - RBC



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