CAD: On hold with little guidance possible - MUFG

On a day in which the US Dollar (USD) sold off across G10, the Canadian Dollar (CAD) advanced by 0.7% yesterday helped in part by the decision of the Bank of Canada to hold off from cutting rates again - the first pause from the BoC since the beginning of the easing cycle in June last year. The OIS market was partially priced for a 25bp cut (at about a 35%-40% probability) so the hold helped push USD/CAD lower, MUFG's FX analyst Derek Halpenny notes.

BoC pauses, but cuts still loom as trade risks persist

The Governing Council would 'proceed carefully, with particular risks and uncertainties facing the Canadian economy'. The BoC also published its Monetary Policy Report and given the difficulty in forecasting the outlook presented two scenarios - Scenario 1 was the more benign with trade tariffs 'negotiated away' but under a difficult and uncertain process that lasts through to the end of 2026. Scenario 2 assumed the current tariffs are added to by the US and a "long-lasting trade war unfolds."

"Scenario 1 sees global and Canadian growth slow temporarily and inflation declines to 1.5% for one year and then returns to the 2.0% target. Scenario 2 there is a sharper downturn in global growth and inflation picks up but in Canada a "significant recession" unfolds with a temporary pick-up in inflation to 3.0% by mid-2026 before then returning to the 2.0% target."

"Based on these scenarios and the comment from Governor Macklem to act 'decisively' if required, this pause probably won't last and a rate cut in June is likely assuming by then we have more clarity in US trade policy. 50bps of cuts are priced in the OIS market which we believe reflects Scenario 1 laid out by the BoC - the more benign one. Anything more aggressive, and the BoC will cut by more than priced."