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Market illusions about the relative resilience of Canada’s economy have been exhausted in recent months, and swap-implied rate projections for the Bank of Canada and the Federal Reserve have converged in a dramatic fashion. Yield differentials and the loonie have come under sustained pressure, with central bankers on both sides of the border now seen delivering rate cuts at a roughly-similar pace through the course of 2024. Number of Rate Cuts Expected, By Meeting
Over the next month or two, we think economic surprise indices will soften in the United States, with consumer spending and labour market measures weakening relative to still-optimistic market forecasts. Global financial conditions should ease as US yields stabilize, and expected growth differentials should narrow, adding momentum to an already-underway portfolio rebalancing process in major investment portfolios. Against this backdrop, high-beta (growth-sensitive) currencies should broadly gain against the dollar, with the Canadian dollar near the head of the pack. Bloomberg Consensus 2024 Growth Forecast, %
Most of the factors driving the peso’s post-pandemic outperformance are still in place. Implied interest rate trajectories suggest that Banxico will cut more slowly and more incrementally than its Latin American counterparts, leaving the currency with one of the best volatility-adjusted carry profiles in the region. Carry Return Index, 1999 = 100 Remittance volumes keep setting new records. Remittances from workers outside Mexico, millions USD And – although reshoring flows are likely overhyped – the country is well-placed for sustained economic gains as supply chains are re-routed through geographically-proximate and politically-compatible parts of the world. We think the peso could...
We think the loonie will struggle to sustain any gains achieved in the coming months and could push above the 1.40 mark in the early new year as the lagging effects of last year’s increase in borrowing costs hit home. Although we expect a modest recovery toward the end of 2024 – mostly driven by a broader easing in global financial conditions – we remain bearish on the loonie over longer time horizons. Canada faces serious and long-term economic challenges, with overvaluation in real estate markets, spectacularly-high private sector debt levels, poor productivity, and an outsized government sector likely to...
Treasury yields are holding steady and the dollar is firmer as traders square positions going into Federal Reserve Chair Jerome Powell’s comments at Spelman College this morning. The 11:00 webcast will mark Powell’s last appearance before the pre-meeting blackout period begins ahead of the central bank’s December meeting, and should land during a relatively quiet trading day: Canada will report its latest employment numbers in half an hour, and the Institute for Supply Management’s manufacturing survey is expected to rise to 47.7 in November from 46.7 in the prior month. Mr. Powell seems likely to avoid declaring “mission accomplished” on...