Bank of Canada's Pause May Lead to More Currency Outperformance in Short Term, Says MUFG

07:24 AM EST, 12/10/2025 (MT Newswires) -- The Bank of Canada has cut by 100bps this year, taking the key policy rate to 2.25% -- two cuts came toward the start of the year with two at the last two meetings in September and October but the flow of data of late suggests the BoC may well be content with the stance of monetary policy, said MUFG.

Canada is one of the growing list of countries where the OIS curve shows pricing for a rate hike at some stage in 2026, wrote the bank in a note to clients.

A 25bps rate hike is fully priced by the October 2026 meeting, pointed out MUFG. A month ago, the OIS market was still leaning slightly toward the risk of another cut.

This shift in expectations is providing some support for the Canadian dollar (CAD or loonie), which is currently the third-best-performing G10 currency on a month-to-date basis, stated the bank.

The turnaround in the labor market has been a key driver in policy rate expectations. The jobs market revealed a 53,600 increase in jobs in November after a 66,600 increase in October. Markets expected a small drop.

The September print was also strong, with the three-month average at 60,000. The unemployment rate has now dropped from a peak of 7.1% to 6.5%. Q3 real gross domestic product also came in much stronger than expected at 2.6% versus a 0.5% seasonally adjusted annual rate, with substantial revisions to the end of 2024.

This is quite a favorable macro backdrop for Wednesday's BoC meeting -- perhaps the best since Governor Tiff Macklem started in his role in June 2020, according to MUFG. This should mean the tone Wednesday will be more skewed to a stronger message of pause than at the last meeting, given the labor market data.

However, the BoC still has reason for caution -- the health of the United States economy remains unclear and the USMCA trade agreement is up for renegotiation next year, which could reinforce trade uncertainties.

MUFG doesn't expect any endorsement of the rate hike pricing for next year -- that seems much too soon for the BoC to endorse.

CAD is the fourth-worst-performing G10 currency in 2025 and a strong message of pause, if matched with further positive data, could result in some additional CAD outperformance over the short term, added the bank.

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