Canadian Dollar: Upside limited against US Dollar ahead of BoC decision - MUFG

MUFG’s Derek Halpenny sees an 80% implied probability of a BoC hike but doubts Governor Macklem will validate the 100 bps of tightening priced through next September. With weak Canadian labour data and lingering US trade risks, he sees little room for front-end yields to rise further. He expects limited downside in USD/CAD and favors a rebound if the Fed stays hawkish.

BoC pricing and Loonie constraints

"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.)