Bank of Canada will likely press pause on 2019 rate hikes

Interesting article written by Katherine Greifeld, Bloomberg News

The world’s largest money manager expects the Bank of Canada to hit the brakes on policy

tightening in 2019.

With officials set to convene in Ottawa, BlackRock Inc. says the central bank will probably hold

rates steady until at least next year as Canadian growth cools and lower oil prices work their way

through the economy, weighing on the inflation outlook. Short-end traders largely agree:

Overnight index swaps are barely pricing in any tightening over the next 12 months.

Investors have slashed expectations for hikes following a dovish December policy meeting and

amid a broad reassessment of the prospect of central-bank tightening as global growth shows

signs of slowing. Given increased market volatility and more restrictive financial conditions, the

BOC will likely pause to see the effects of its five rate hikes since mid-2017, according to

BlackRock’s Aubrey Basdeo.

“The bank has latitude to go on an extended pause,” said Basdeo, the firm’s Toronto-based head

of Canadian fixed income. “What’s the rush to get to neutral if inflation’s not an issue?”

The Canadian dollar sank almost 8 per cent against the greenback in 2018, the second-worst

performer among Group-of-10 currencies, although it’s rebounded along with oil to start 2019.

Basdeo expects the dollar-loonie pair to stick to a $1.30-$1.36 range as policy makers take a

wait-and-see approach, from about $1.33 currently.

Different View

Not everyone agrees. Morgan Stanley recommended shorting the greenback against the Canadian

dollar in a note to clients Monday, targeting a move to $1.28. While a sputtering housing market

and weak business investment pose challenges to the Canadian economy, “the risk of a hawkish

surprise is growing” from the Bank of Canada given such low market expectations.

“Increasing prospects for a weaker USD, an underpriced BOC curve, increasingly balanced risks

on oil and supportive technicals suggest USD/CAD should fall from here,” wrote foreignexchange

strategists David Adams and Sheena Shah.

Citigroup Inc., while anticipating policy makers will keep rates unchanged Wednesday, sees a 40

percent chance of a hawkish hold, and recommends clients short the U.S. dollar relative to the

loonie ahead of the meeting.

“Disappointment to dovish expectations may trigger a bullish CAD reaction as the BOC is

interpreted as one of the most hawkish central banks within the G-10,” FX strategist Kiranpal

Singh wrote Monday.