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The Bank of Canada (BoC) Raised its Policy Rate by 25bps in January and also Provided a Slightly More Hawkish Outlook

Investment Navigator - February Newsletter

Written by Nitin Manohar
February 2, 2018

The Bank of Canada (BoC) raised its policy rate by 25bps in January and also provided a slightly more hawkish outlook. The BoC upgraded its assessment of the level of spare capacity in the economy, it upwardly revised its global growth forecasts, it raised its inflation forecasts, and it also slightly increased its 2018 and 2019 Canadian economic growth forecasts. This has all helped the Canadian dollar hold steady relative to the U.S. dollar since the January 17th BoC announcement. However, the BoC’s Monetary Policy Report does not explicitly indicate that the bank views the strength of the Canadian dollar as an impediment to further rate increases. We maintain our view that monetary policy tightening by the U.S. Federal Reserve should support the USA dollar relative to the rest of the developed market currencies in the first half of 2018, while the outperformance trend may struggle to extend beyond the second quarter as the monetary policy bias of other major central banks could turn more hawkish/less dovish. We view the Canadian dollar at around US$0.80 as a reasonable level for much of 2018.

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