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Mar 06 - 09:55 AM

BofA: BoC Expected to Hold Rates; USD/CAD Outlook and Trading Strategy

By eFXdata  —  Mar 06 - 08:34 AM

Synopsis:

Bank of America (BofA) projects the Bank of Canada (BoC) will maintain the overnight rate at 5.0% during its March 6 meeting, anticipating minimal changes to its statement. BofA points to the weakening economic activity and softening labor market as signs that a rate cut may be on the horizon. However, with core inflation trending below 3.5% but showing signs of stability, the expectation is for the BoC to delay cuts until more conclusive evidence emerges, potentially by June. The upcoming meeting may hint at an April cut, especially if February's inflation figures attract special attention.

Key Points:

  • Economic and Inflation Trends: Sluggish economic performance and a cooling labor market in Canada, alongside a downward trend in core inflation, suggest the BoC is nearing a rate cut phase.

  • Rate Cut Timing: Although a rate cut seems impending, BofA believes the BoC will hold off for further confirmation of a sustained inflation downtrend, targeting June for potential action.

  • Meeting Risks: There's a possibility the BoC could signal a more imminent rate cut, especially if it emphasizes recent inflation data, possibly setting the stage for a cut as early as April.

  • Rates and FX Strategy: BofA advises that the market may be underestimating the likelihood of BoC cuts, advocating for long positions on Canadian rates versus U.S. rates, bolstered by Canada's decelerating inflation relative to the U.S. For foreign exchange, a short-term bullish outlook on USD/CAD is expected, projecting it to rise above 1.35, with a more significant appreciation of the CAD against the USD anticipated in the second half of 2024.

Conclusion:

BofA anticipates the BoC to keep rates steady in the upcoming meeting, with a watchful eye on inflation trends before committing to rate cuts, likely by June. The potential for a more immediate rate cut will hinge on the BoC's interpretation of recent inflation figures, with implications for both rate and currency strategies. Investors are encouraged to consider long positions in Canadian rates against U.S. rates and prepare for short-term USD/CAD strength, followed by a gradual CAD appreciation later in the year.

Source:
BofA Global Research

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