Markets too aggressive on BOC rate hikes
The Canadian dollar is the top performing G10 currency this year but will struggle against the US dollar in 2022, CIBC forecasts.
In its monthly FX outlook, the Canadian banks makes the case for USD/CAD longs next year. They see the pair at 1.24 at year end, rising to 1.28 in Q1 and above 1.30 next year.
We see USDCAD drifting above the 1.30 mark next year, as it becomes clear that Canada's central bank will not be outgunning the Fed, and as oil prices retreat from recent highs. Softer crude prices and a return to Canada's usual travel deficit as tourism restarts will weigh on the country's trade balance, which has been supportive for the loonie in recent quarters.
They see the BOC hiking twice next year and three times in 2023. That's less aggressive than market pricing. They have also previously highlighted how large Canadian household and mortgage debt burdens mean BOC hikes will hit harder on consumption than in previous cycles.
