We are pleased to bring you the latest edition of the series produced by our colleagues in RBC Capital Markets, hosted by George Davis, CMT, the award winning Chief Technical Analyst for Fixed Income and Currency Strategy.
In this installment George discusses changes to CM’s interest rate profile and how the messaging from the Bank of Canada has changed from earlier this year. Concern has shifted from inflation moving toward the BoC’s 2% target, to concerns of downside risks to economic growth making inflation more of a neutral issue. Going forward, the BoC will likely be more aggressive in cutting rates resulting in our interest rate strategists adjusting their expectations for cuts. CM now expects another 50 bps rate cut in December and have added two more rate cuts in 2025 taking the terminal rate from 3% down to 2%. This downward shift in interest rate expectations will likely be bearish for CAD with USDCAD to end the year at 1.4000, reaching a peak of 1.4200/1.4300 in Q2 of next year and then decline to 1.4100 by the end of 2025.
Looking at the election outcome, Trump’s policies point to an inflationary environment in the US via tariffs, tax cuts to increase spending and cutbacks to immigration resulting in wage pressures. This suggests a bullish scenario across the board for the USD, US yields and the stock market. For the month ahead George sees a higher trading range starting at 1.3700/1.3800 on the downside and 1.4100/1.4200 on the topside. Thus, it makes sense for USD sellers to start to layer in at 1.4000 and above, while USD buyers should look for shorter-term corrections toward the 1.3800/1.3850 area.