Canadian Dollar: Gains against US Dollar seen capped before BoC decision - MUFG

Further gains in front-end yields look constrained, while USD/CAD has limited downside, according to MUFG’s Derek Halpenny, who points to weak Canadian labour data and persistent US trade risks. Although market pricing implies an 80% probability of a BoC hike, he doubts Governor Macklem will endorse the 100 bps of tightening priced in through next September. A hawkish Fed stance would favour a rebound in USD/CAD, in his view.

Can BoC pricing leave the Loonie room to strengthen?

"The pricing for today’s BoC meeting indicates an 80% probability of a rate hike which is not quite in done-deal territory and there is scope for a surprise."

"But there is 100bps of hikes priced into the OIS curve out to September next year and hence the question is – will today’s communications be consistent with that extent of hikes currently priced?"

"The Canadian economy lost 68.3k jobs in September after a loss of 41.7k in August."

"So we don’t see much scope for USD/CAD to move lower on the back of a hike today."

"Assuming Fed Chair Warsh does enough to keep markets positioned for three more hikes, a rebound in USD/CAD looks more likely than an extension further lower."

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