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Sustainability Newsletter

Sustainability Newsletter Edition 28

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FICC Strategy Reports

Canada Rates Year Ahead 2023 - Bending the Knee

To state the obvious, Canadian rates underwent significant changes in 2022. And these changes were symptomatic of three forces, including: i) front-loaded rates hikes; ii) QT, and; iii) improving fiscal policy. In aggregate, these governing forces generated extreme levels of curve inversion, exerted significant downward pressure on shorter-dated swap spreads, and produced a half-year long streak of cross-market outperformance. And while QT will linger (and actually strengthen) in 2023, the impact of both monetary and fiscal policies are starting to shift. As they do, it will pave the way for incoming themes to flex their muscles, engendering material impacts across the complex that are quite different compared to this year. In the year-ahead we see three dominant themes that will govern CAD rates. The first is the introduction of the ‘higher for longer’ regime, which reflects a longer transition period between the last BoC hike and the eventual first cut. The impact of this theme is a widening of the differential between medium-term and short-term rate expectations — a key building block of curve steepening. The second theme is reduced sensitivity to US rates, as the BoC ends it’s hiking cycle earlier then the Fed. The immediate impact as the Fed continues hiking will be the preservation of CAD richness in the early part of 2023. However, as the year progresses it will be difficult for CAD rates to maintain current cross-market valuations, particularly as the Fed stops hiking in the early part of 2023. This should generate significant CAD rates underperformance after Q1-23. The third and final theme is a shift in the preferences of structural domestic investors, including bank treasuries, LDI managers, and insurers. This will lead to a much flatter swap spread curve, but less dramatic cash steepening pressure compared to the United States.
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FICC Strategy Reports

FX Year Ahead 2023 - A Tale of Two Halves

The article provides CIBC's latest outlook for the major currencies: USD – Shifting into neutral gear CAD – Chin Up CAD Bulls, Your Time is Coming! EUR – Looking Through the Immediate Headwinds GBP – Another year of policy challenges JPY – Preparing for normalization AUD and NZD – Towards a major base, but not there yet MXN – MXN outperformance against Latam peers to continue in 2023 BRL – Fiscal headlines will keep volatility high but lower USD/BRL bias to remain in place CLP – Political moderation fails to provide enough support to the CLP COP to remain under pressure into 2023 CNY – Recovery will take time
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