Brown Brothers Harriman’s Elias Haddad expects the Canadian Dollar (CAD) to be cushioned even if markets scale back aggressive Bank of Canada (BoC) rate hike pricing. Haddad argues swaps have more than fully priced 50 bps of tightening over twelve months despite contained inflation and slack in the economy, while firm Oil prices deliver a positive terms-of-trade shock that offsets any CAD drag.

Hawkish pricing versus Oil support

"Canada April labor force survey is due today (1:30pm London, 8:30am New York). The economy is expected to add +10.0k jobs in April vs. +14.1 in March. Risks are skewed to the upside given the improvement in firms’ hiring intentions. Nonetheless, employment growth has generally been subdued and contracted by an average of -31.5k in the past three months."

"The swaps curve has more than fully priced in 50bps of Bank of Canada (BOC) rate hikes in the next twelve months to 2.75%. That looks too aggressive in our view as Canada underlying inflation and long-term inflation expectations remain contained. Moreover, the BOC estimates the output gap over Q1 2026 to be between -1.5% to -0.5% while a range of indicators suggest some slack in the labor market."

"The drag to CAD from a possible downward adjustment to the swaps curve is more than offset by the positive terms of trade shock to Canada’s economy from firm crude oil prices."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)