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Podcast Series
Curve Your Enthusiasm

Big conversations in the short-end

Ian is joined this week by Brenden Donaher, and the duo begin the episode by discussing Bank of Canada pricing for the upcoming meeting. Ian walks through various scenarios around the meeting, and Brenden provides his view on what that means for 2023 pricing. Brenden introduces the idea that the USD still remains the most important factor driving Canadian short-end pricing, despite some idiosyncratic developments which will occur next year. Ian spends some time walking through his outlook for rates in 2023, while Brenden provides his view on the year-end turn as well as the reasons why CDOR-OIS looks too cheap compared to spot pricing.
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Article Series
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.
Articles & Reports
Article Series
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
Articles & Reports
Podcast Series
Curve Your Enthusiasm

Bank of Canada preview

Ian and Andrew discuss their expectations for the Bank of Canada interest rate decision next week. The duo walk through the reasons why the Bank will need to hike by another 75.0bps next week, and look at the most likely path of short-rates over the rest of the year. Ian talks about his favorite trades going into the release, noting that the forward expectations for BoC policy are too flat. Andrew spends some time detailing his expectation of forecast changes in the MPR, while the pair spend time talking about the impact that a weaker Canadian dollar has on both CPI and the stance of policy.
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