08:30 AM EDT, 07/30/2024 (MT Newswires) -- In the Bank of Canada's (BoC) Monetary Policy Report (MPR) which was published last week, there is an entire section devoted to "Ongoing Excess Supply" (and another on "Slowing Inflation"), noted Rosenberg Research.

"Very powerful stuff," Rosenberg stated. The main issue is that even with an anticipated growth recovery, there will still be

a deflationary output gap in place through 2026.

The BoC will never publicly forecast these numbers, but given where the "gap" is today and where it will be in the next two years, that takes Canada to a 0% headline from +2.7% by 2026 and the unemployment rate up to 8% (from 6.4% presently). When Rosenberg Research then applies what the appropriate policy rate would be under this scenario relative to the BoC's mid-point estimate of 2.75% for "neutral" (in nominal terms), it's talking about reaching a low of 2% this cycle (that is a conservative estimate).

That, in turn, would take the two-year Government of Canada (GoC) note yield to 2.5% (-110 basis points from where it's today), the five-year down to 2.75% from 3.2% and the 10-year rate to 3.2% from 3.3%.

The real action will be at the front end of the Canada curve and the best risk-reward total return potential at the midpart (five-year) of the maturity spectrum. Lest you think this is a radical forecast, the policy rate in Canada got as low as 2% (or lower) in each of the past four BoC easing cycles over the past quarter-century, pointed out Rosenberg.

At the same time, the historical record shows with near consistency, that the Canadian dollar (CAD or loonie) breaks above C$1.40 (the average worst level in these easing cycles coming to C$1.42 - at

this juncture, just 4 "big figures" away).