The two-month rally in the Canadian dollar, from US$0.73 to US$0.80, doesn’t pose any direct threat to the economy, particularly given the significant decline in the real trade-weighted exchange rate over the past few years. While the higher nominal exchange rate might lead to some further temporary softness in inflation, the Bank of Canada would continue to look through that. Accordingly, we think the BoC will remain hawkish on the interest rate outlook in the very near term.
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