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BoC to only raise once in 2018? - Scotiabank

Analysts at Scotiabank explained that the Canadian dollar (CAD) has been volatile in the past few months, with the primary driver of movement reflecting shifting market expectations regarding Bank of Canada (BoC) monetary policy. 

Key Quotes:

"Markets widely expected additional tightening steps to follow relatively quickly after the successive hikes seen in July and September. 

But the BoC’s “dovish hold” decision in October effectively doused any thought of any more tightening occurring before Q1 next year. 

Spreads, which had moved significantly in the CAD’s favour through Q3, narrowed again to undercut the CAD."

"We have adjusted our own forecasts for the BoC and now look for rates to remain on hold until 2018 when we see only two 25bps increases now. 

We have adjusted our expectations for the CAD significantly as well, lifting the 2017 year–end forecast to 1.28 and our end 2018 forecast to 1.25. 

Crude prices have not correlated at all with the CAD in recent weeks (our correlation studies have shown a zero correlation effectively over a rolling 22-day timeframe though much of October, the weakest relationship since 2014."

"But the linkage is recovering and may become more significant for the CAD – in a positive fashion – if recent gains in WTI crude can extend through recent range peaks around $55/bbl. Downside risks for the CAD moving into 2018 centre on NAFTA talks ending without agreement."

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