USD/CAD to move back towards the 1.4000 level – MUFG
27.10.2022, 11:50

USD/CAD to move back towards the 1.4000 level – MUFG

Attempts to price in a Fed pivot have gathered pace after a smaller-than-expected hike from the Bank of Canada (BoC). Nonetheless, economists at MUFG Bank expect the USD/CAD pair to hit 1.40 as the BoC’s dovish surprise does not have implications for the Federal Reserve.

Yield spread between Canada and US moving in favour of USD

“BoC delivered a smaller than expected 50 bps rate hike. It was the second consecutive meeting at which the BoC has stepped down the size of rate hikes after delivering a 100 bps hike in July and a 75bps hike in September.”

“We would caution over reading too much into the BoC’s policy decision as an accurate guide for future Fed policy decisions. Canada’s economy is likely to prove more sensitive to higher rates than the US economy given much higher household debt levels. There is already clearer experience of a sharper slowdown in the Canadian labour market.” 

“Yesterday’s decision from the BoC supports our view that yield spreads between the US and Canada will continue to move in favour of USD as the Fed hikes rates for longer and lifts rates higher than the BoC during this hiking cycle.”

“We are not convinced yet the US dollar and Fed rate hike expectations have peaked out yet, and still expect USD/CAD to move back towards the 1.4000 level.”

 

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