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On Thursday, the Bank of Canada released its Annual Financial Stability Review, honed in on developments in the housing market that pointed to “extrapolative expectations.” It is clear that global central banks are beginning to communicate to the markets the risks that are emerging from aggressive monetary and fiscal easing. Regarding the loonie, economists at MUFG Bank expect USDC/AD to move below the 1.20 mark.  

BoC Financial Stability Review warns of exuberance

“Purchases are partly fuelled by an expectation that house prices will continue to rise. Toronto, Hamilton and Montreal were cited as the areas showing this with others close behind and if maintained posed a threat of financial market stability.”  

“There was no indication of this report, which expressed concerns over growing levels of debt, having implications for monetary policy. But it certainly fits with the theme that building inflation risks and loose monetary conditions are factors that are increasingly in focus that will likely see many central banks begin to shift their policy guidance in the coming months.”  

“The report was released the day after Canada’s CPI data and while the data was not as shocking as the US CPI data last week, it was still considerably higher than expected and helped reinforce expectations of the BoC moving further ahead of the Fed in reversing the current monetary stance.”

“Based on domestically priced crude oil prices (Canada Select), USD/CAD has extended beyond implied fair-value but we maintain an optimistic view on the outlook for crude oil prices and hence, the potential for a near-term break in USD/CAD below the 1.2000-level remain realistic.”

 

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