CAD: BoC On The Sideline This Year; Staying Structurally Bearish - Barclays

CAD started 2017 with a positive tone, as the December employment report (+53.7k), merchandise trade (first trade surplus since 2014) and PMIs surprised to the upside following a string of poor data into year-end, suggesting a slightly better Q4 16. The loonie has been supported by a shift in market expectations, as a more positive outlook for the US and stable oil prices are tailwinds for the Canadian economy.

Although we and the market expect the BoC to stay on the sidelines this year, pricing suggests a shift from easing as the most likely next move to a rate hike as most probable in 2018 (Figure 8).

We are bearish on the CAD, however, as the economy continues to adjust to the oil shock, amid disappointing activity, low inflation and diverging monetary policy, coupled with uncertainty regarding economic policy in the US, including a possible renegotiation to NAFTA and restrictions to trade.


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