Key Insights:
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BoC Rate Decision:
- BofA anticipates that the BoC will maintain the overnight rate at 5.0%, with no adjustments to its forward guidance.
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Economic and Labor Market Context:
- Despite weak economic activity leading to a looser labor market, wage growth remains high at 5.7% year-over-year in December. The BoC has indicated that wage growth exceeding 4.0-5.0% could hinder achieving price stability.
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Inflation Trends:
- The BoC seeks a continued and significant reduction in core inflation, which has not yet materialized.
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Rate Strategy Outlook:
- There could be potential for outperformance in Canadian government bonds compared to U.S. bonds, given differing inflation trends and rate cut expectations between the two countries.
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FX Strategy for CAD:
- BofA projects short-term fair value for USD/CAD at 1.34-1.35. Any appreciation of the Canadian dollar against the U.S. dollar in 2024 is expected to occur later in the year.
Conclusion:
BofA’s analysis suggests a conservative approach by the BoC in its upcoming policy meeting, reflecting caution amidst persistent wage growth and incomplete core inflation reduction. The bank’s outlook on rates and foreign exchange strategies indicates potential opportunities in Canadian government bonds and a gradual strengthening of the Canadian dollar later in 2024. This perspective underscores the intricate balance central banks must maintain between economic indicators and policy actions.
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