Dovish rate expectations to be challenged – ING

Last week’s Canadian jobs numbers came in quite strong. Employment rose 47k, almost twice the consensus figure, and unemployment surprisingly dropped back to 6.5%. On the same day, the Bank of Canada released its Business Outlook, which showed a further easing in inflation expectations, but also a rebound in business optimism and expectations for future sales, ING’s FX strategist Francesco Pesole notes.

USD/CAD may struggle to break decisively lower

“The latest data, paired with the hawkish repricing in Fed expectations, should be enough to discourage bets on a 50bp cut by the BoC this year, in our view. However, markets continue to price in 71bp of BoC easing over the next two meetings, with 37bp for next week’s rate announcement.”

“Canadian inflation is released today, but we doubt that will be a game changer for BoC rate expectations. Headline CPI is seen as having dropped below 2.0% in September, but core measures may have stalled. That should continue to point to rate cuts, but the improved jobs picture does not justify 50bp reductions.”

“We expect The Canadian Dollar (CAD) to outperform in the crosses thanks to some BoC hawkish repricing. USD/CAD may struggle to break decisively lower, but a retightening of rate differentials should allow at least a halt in the rally, and perhaps a correction back to 1.37 in the near term.”