Overview: MUFG anticipates a straightforward decision from the Bank of Canada (BoC) in its upcoming meeting, with a strong likelihood of maintaining the current policy rate amid emerging signs of economic deceleration. Despite global tensions and other currencies' weaknesses, the Canadian dollar (CAD) has remained relatively resilient, partly buoyed by rising energy prices.

Key Expectations:

1. Holding Policy Rate: The Overnight Index Swaps (OIS) market reflects almost complete certainty (near 100%) that the BoC will keep the policy rate unchanged. This consensus aligns with recent economic indicators, suggesting a slowdown that warrants a cautious monetary policy approach.

2. Potential Dovish Tone: Given the economic data flowing in since July, there's an expectation for the BoC to revise its economic forecasts downward. While a dovish shift in communication is possible, the BoC might avoid signaling an end to its tightening cycle without more substantial evidence, specifically further decreases in inflation rates.

3. Elevated Wage Growth: Despite the broader economic cooling, annual wage growth in Canada remains robust at 5.3%, outpacing projections. This strength in wages is a key factor that the BoC will likely consider in its policy deliberations.

4. Market Reaction and CAD Performance: Should the BoC reaffirm its current policy stance, MUFG foresees a muted reaction in currency and rates markets. However, any unexpected deviation—particularly a hint at earlier-than-anticipated easing—could lead to CAD underperformance, as the market would start pricing in more aggressive rate cuts for 2024.

5. USD/CAD Assessment: MUFG considers the current USD/CAD levels as an overshoot when juxtaposed with yields and crude oil prices. They posit that reiteration of the BoC's existing guidance could initiate a correction, potentially strengthening the CAD against the USD.

Conclusion: MUFG predicts a non-disruptive outcome from the BoC's imminent policy meeting, with the central bank poised to maintain rates in response to slowing economic momentum. While acknowledging potential dovish signals due to softer economic indicators, they believe the BoC will desist from any dramatic shifts in guidance, ensuring market stability. Any confirmation of this expectation could induce a recalibration in the USD/CAD pair, aligning it more closely with fundamental economic indicators.