Chart Of The Week   October 29 2021

The End Of QE In Canada

End of QE in Canada

The Bank of Canada delivered a hawkish surprise on Wednesday. It announced the end of its quantitative easing program. Instead it is shifting to the reinvestment phase whereby it will only purchase bonds to replace maturing ones and maintain its holdings of Canadian government bonds stable. Moreover, Governor Tiff Macklem noted that “we will be considering raising interest rates sooner than we previously thought.”

In the latest Monetary Policy Report, the BoC revised down its real GDP growth estimates for 2021 and 2022 by 0.9 pp and 0.3 pp respectively relative to its July forecasts. However, Governor Tiff Macklem highlighted that supply chain disruptions have become more widespread and appear to be more persistent than the Governing Council had anticipated. Thus, the BoC brought forward its expectation for when the output gap will close to mid-2022 from previous estimates of the second half of 2022. The central bank also foresees inflation to be “higher for longer” relative to the July forecast.

The loonie rallied and short-dated Canadian government bonds sold off sharply in response to the BoC’s communication. Our Global Fixed Income strategists have been expecting the central bank to move up the timing of its first rate hike to H1 2022. Thus, they have been recommending that investors remain underweight Canadian government bonds. With the BoC likely moving ahead of the Fed in raising interest rates, our FX strategists favor CAD vis-à-vis USD. Strong oil prices also support a positive outlook for the Canadian dollar.