MUFG’s Derek Halpenny highlights that the Canadian Dollar has been relatively resilient since the conflict began, supported by Oil-linked terms of trade. He expects the Bank of Canada to hold rates and deliver a cautious message, stressing uncertainty around energy-driven inflation. MUFG sees scope for BoC easing by year-end, with USD/CAD likely to stay in a tight range unless the conflict and Oil prices escalate further.

BoC on hold as data softens and risks rise

"In addition to the FOMC meeting this evening, the Bank of Canada meets and will announce its monetary policy decision at 13:45 GMT. The decision takes place today against a backdrop that has of course changed notably and hence we’d expect a cautious message by the BoC as well that will likely emphasise the high level of uncertainty and hence the need for additional time in order to assess the extent of the potential inflation impact from higher energy prices."

"Whether that CAD performance can persist is questionable. The BoC meeting today follows a terrible employment report with jobs declining by 84k in February, driven by a 108k drop in full-time employment. It was the largest drop since the plunge in jobs in April 2020 following the start of covid."

"We continue to assume the Trump administration will engineer and off-ramp to de-escalate within the next two weeks and hence we would assume the BoC could still be in a position to cut by year-end. But the message today will be clear – the BoC needs time to assess the possible extent of the energy price shock before making any conclusions on the direction of the policy path."

"In that scenario, USD/CAD should remain in a relatively tight trading range and initially if the conflict was to last longer and crude oil prices were to jump further beyond the USD 100-level then CAD support from the terms of trade dynamic could start to fade if North America growth risks increase and equity markets take a hit."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)