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With incoming economic data softening across North America, market projections for central bank policy paths have shifted significantly in the last few weeks.

In contrast with implied market pricing on October 18 – when the Federal Reserve was seen delivering at least one, maybe two cuts by November 2024, even as the Bank of Canada was expected to keep rates on hold – the US is now seen slashing rates at least three times, while Canada is expected to cut at least twice.

To us, this has reduced mispricing embedded in dollar-Canada rate differentials, and has temporarily reduced downside risks for the loonie. We still have a bearish outlook on the Canadian dollar for the coming quarters: we expect consumer consumption to fall more aggressively than markets expect in the late winter and early spring. But overly-ebullient projections for the Bank of Canada’s policy path have undergone a material correction, and technical factors suggest that the greenback’s decline could have further to run in the near term.

Important correction: In today’s Morning Brief, we suggested that investors had moved to price at least four cuts into the US curve between now and January 2024. Four cuts have been priced into the curve between now and January 2025, not 2024. We apologize for the error, and for any inconvenience caused.

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