The Canadian dollar unwinds yesterday’s loss but the Bank of Canada (BoC) risks linger. Economists at Scotiabank expect the loonie to weaken following the BoC meeting, rising USD/CAD to the 1.25/26 area.

BoC to cool down rate expectations

“The CAD is one currency that we fully expect to hold its own– and even improve somewhat – against a more robust USD going forward, given our forecast for a relatively rapid tightening in the BoC policy rate once that tightening cycle gets started (we assume H2 next year).” 

“We fully expect a further reduction in asset purchases but policy makers might try to dampen rate expectations somewhat in order to avoid disappointing market participants and creating more volatility down the road.” 

“We look for narrow range trading for the CAD ahead of tomorrow’s policy decision and feel the risk of soft-pedaling nearer-term rate expectations might nudge the CAD somewhat lower in the short-run. USD gains to the 1.25/1.26 will very likely be met with renewed USD supply, however.”