USD/CAD has climbed back above 1.2600 after hitting a low last month of 1.2288. But as economists at MUFG Bank expect the Bank of Canada (BoC) to begin to ease off the monetary-policy accelerator to hike rates in the second quarter of next year, the loonie’s sell-off should be short-lived.

A temporary setback for the Canadian dollar

“The correction lower for the price of oil has had only a modest dampening impact on G10 oil-related currency performance so far. The hawkish repricing of Fed tightening expectations and broad-based US dollar strength have been the main drivers of those currency moves rather than the correction lower in the price of oil.”

“The CAD took a hit on Wednesday after the release of slighter softer than expected inflation data from Canada. The average of the BoC’s core inflation measures were unchanged at 2.7%. It prompted some scaling back of BoC rate hike expectations. Nevertheless, headline inflation did still accelerate to 4.7%. It keeps pressure on the BoC to continue normalizing policy after bringing QE to an end last month. The BoC has brought forward plans for the first-rate hike to Q2 2022, and risks are skewed in favour of an even earlier hike next year.” 

“We expect recent Canadian dollar weakness to prove short-lived.”