200 basis points of hiking in two years?

BOC of canada rate forecast

This week's CPI data and Bank of Canada business outlook survey paint a picture of a strong economy with plenty of jobs and growing inflationary pressures.

Next week, the Bank of Canada will have to either acknowledge the rate hikes are being priced in as soon as April, or try to keep those expectations closer to mid-year, when they currently forecast the output gap will close.

One way to gain some flexibility would be to taper more quickly, something analysts at Scotia acknowledge today.

Governor Macklem is likely to announce a further reduction in weekly purchases of Canadian government bonds from the current pace of $2 billion, we think it is likely the pace is lowered to $1 billion per week but zeroing out the program is also possible.

They note that three hikes are now priced in for 2022 up from just one a month ago. Economists there now forecast four hikes in H2 2022 and another four in 2023.

Economist Derk Holt on BNN today flagged potential inflation problems.

"This isn't transitory at all," Holt said. "You can't just talk through inflation readings like this."

Canadian two-year note yields have made a big move to the upside this month, rising to 0.81% from 0.55% at the start of October. That's opened up a decent gap over US 2s at 0.37%. That reflects the market falling in line with those rate hike expectations:

Canada 2 year

There's a good argument that Canada should be the developed market leader in this rate hiking cycle, particularly if energy prices hold up.

At the moment, USD/CAD is threatening yesterday's low and I've been banging the drum about 1.20 for awhile. That might be just the beginning.

The setup in CAD/JPY is even better because the BOJ isn't going to be getting off the floor anytime soon.