MUFG Reports CAD Steady as BoC Pauses; Uncertainty Still There
Though the Bank of Canada (BoC) chose to stop its rate-cutting cycle, the Canadian Dollar (CAD) rose 0.7% on the day despite generalised US Dollar (USD) weakening among G10 currencies. Since beginning to relax in June last year, this is the first time the BoC has maintained rates. According to MUFG FX analyst Derek Halpenny, the halt caused a decline in USD/CAD as markets had partially priced in a 25 basis point decrease with about a 35–40% likelihood.
BoC Stops; But More Cuts Could Follow
The Governing Council of the BoC indicated caution, saying it will “proceed carefully” under continuing economic uncertainty and dangers. The BoC suggested two possible future routes in its Monetary Policy Report:
Scenario 1: Although the negotiation process stays protracted, trade tensions relax over time, running until 2026. Under this scenario, inflation falls to 1.5% before slowly returning to the 2.0% goal, with global and Canadian growth slowing momentarily.
Scenario 2: Trade tensions rise, with more US tariffs starting a protracted trade war. This scenario foresees a "notable recession" in Canada and a wider worldwide slump; inflation might momentarily increase to 3.0% by mid-2026 before returning to target.Suggesting that this break would be brief, BoC Governor Tiff Macklem underlined the central bank’s willingness to “act decisively” if required. Particularly if there is greater clarity on US trade policy by then, a June rate cut still on the table.
Markets are now pricing in 50 basis points of easing to match the more hopeful Scenario 1. The BoC might be compelled to provide even bigger cutbacks, though, should circumstances deteriorate and Scenario 2 materialises.
