Synopsis:

MUFG expects the Bank of Canada (BoC) to deliver a 50bps rate cut this week, citing a weakening Canadian labor market. They recommend staying long USD/CAD, targeting 1.4550 as policy divergence supports further CAD downside.

Key Points:

BoC Rate Cut Expectation:

• Forecast: BoC expected to cut rates by 50bps to 3.25%.
• Labor Market Data: November’s Canadian jobs report showed a sharp labor force expansion (+137.8k) and a higher unemployment rate at 6.8%, reinforcing slack in the economy.
• Policy Outlook: More cuts are likely as the BoC aims to lower rates toward its revised policy range of 2.25%-3.25%.

USD/CAD Trade Recommendation:

• Trade Idea: Stay long USD/CAD targeting 1.4550.
• Rationale:
  • Monetary Divergence: Expected rate cuts by the BoC contrast with more stable US policy.
  • CAD Weakness: Canada’s softening labor market and broader economic risks weigh on the CAD.

Conclusion:

MUFG expects the BoC’s aggressive easing path to weaken the CAD further, making long USD/CAD a favorable trade. They maintain a target of 1.4550, banking on continued policy divergence and mounting economic concerns in Canada.