BoC: Expect a more upbeat tone to the central bank's neutrality - BBH

Research Team at BBH notes that the BoC’s overnight rate will remain unchanged at 0.5%, and the anticipation of closing the output gap in mid-2018 also won't be altered.

Key Quotes

“However, we flag this because we expect a more upbeat tone to the central bank's neutrality.  Also, we suspect that in the US dollar appreciation that we expect to resume shortly, investors will also look for alternatives to the greenback and the Canadian dollar is a potential candidate.  The Canadian dollar was the strongest of the major currencies against the US dollar in 2016, gaining almost 3%. The US dollar has been sold from CAD1.36 on December 30 to nearly CAD1.30 on January 12.   The US two-year premium has fallen from nearly 48 bp to 39 bp at the end of last week. It is approaching the lower end of a range  (~35 bp) that has been sustained since the middle of November.  The US premium had risen steadily from below six bp last-July.    The US 10-year premium more than doubled from last April's 32 bp to 81 bp peak in late-November.  It has subsequently pulled back and has not been above 70 bp since January 4.”