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Feb 21 - 10:55 AM

MUFG: BoC to Remain Cautious; Implications and Levels to Watch in USD/CAD

By eFXdata  —  Feb 21 - 10:00 AM


MUFG anticipates a cautious approach from the Bank of Canada (BoC) regarding signaling imminent rate cuts at the upcoming policy meeting on March 6. Despite softer CPI data leading market participants to price in potential BoC rate cuts by June, with a more than 50:50 probability for an April cut, MUFG outlines a framework that supports the view of Canada's economic indicators justifying a shift towards less restrictive monetary policy.

Key Insights:

  • BoC Policy Outlook: MUFG expects the BoC to maintain caution and possibly delay signaling imminent rate cuts, focusing on assessing further economic data.
  • Market Pricing for Rate Cuts: Recent softer CPI data has led to adjustments in market expectations, with significant pricing in for BoC rate cuts by June and a notable probability for an April cut.
  • Economic Rationale for Rate Adjustments: Given Canada's below-potential growth and slowing inflation, there appears to be a strengthening case for the BoC to adjust rates towards less restrictiveness. Notably, inflation metrics, excluding mortgage interest rate costs influenced by past BoC hikes, align with the BoC's 2.0% target.
  • USD/CAD Outlook: These developments suggest an increased likelihood for USD/CAD to maintain levels above the 200-day moving average support, around 1.3480, in the near term.


MUFG's analysis underscores the balancing act the BoC faces in signaling future monetary policy adjustments amidst evolving economic indicators. Market anticipation for rate cuts reflects broader expectations for a policy shift, which, combined with underlying economic fundamentals, suggests a cautious upward trajectory for USD/CAD in the near term. This perspective highlights the importance of upcoming economic data and BoC communications in shaping future rate expectations and currency market dynamics.

MUFG Research/Market Commentary


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