USD/CAD has fallen towards 1.3800 after the BoC decision, challenging MUFG’s warning that tariff uncertainty would keep the Canadian Dollar weak.
The US Dollar to Canadian Dollar (USD/CAD) exchange rate has fallen to around 1.3804 after the Bank of Canada delivered a more hawkish policy message than markets had expected.
The pair is down from 1.3895 at the beginning of September, leaving MUFG’s bearish Canadian Dollar assessment facing an early test.
MUFG correctly anticipated that the central bank would leave interest rates unchanged.
“The first meetings take place tomorrow with the RBNZ set to hike while the Bank of Canada is likely to remain on hold.”
That part of the forecast proved accurate, but the Canadian Dollar’s reaction did not follow the weaker path envisaged by the bank.
MUFG Highlights Canadian Tariff Risks
MUFG’s concern centred on deteriorating relations between Canada and the United States.
“The Bank of Canada has other risks to consider following the escalation of the trade war with the US and the risk of auto, auto parts, steel and light & heavy truck tariffs being lifted from 25% to 50% at the start of 2027 will act to dampen Canadian corporate sentiment.”
The bank concluded: “The Canadian dollar will likely continue to underperform until there is clarity on tariffs in both directions.”
That argument has not disappeared.
Higher tariffs could discourage business investment, weaken hiring and leave Canadian exporters facing a prolonged period of uncertainty.
Nevertheless, the latest fall in USD/CAD shows that monetary policy can offset those concerns, at least temporarily.
Bank of Canada Opens Door to Higher Rates
The Bank of Canada held its overnight rate at 2.25%, with the Bank Rate remaining at 2.50%.
Officials reported that second-quarter GDP had expanded by 3.3%, while inflation was running around 3%, partly because of higher petrol prices.
The decision itself was expected.
The surprise came from the stronger emphasis on upside inflation risks and the possibility that more than one rate increase could ultimately be needed if price pressures remain elevated.
That warning encouraged markets to reconsider the path for Canadian interest rates.
It also gave the Canadian Dollar enough support to push USD/CAD below 1.3850 and towards 1.3800.
US$/CA$ Outlook: Has MUFG’s Bearish Call Been Invalidated?
Not yet. The BoC has strengthened the Canadian Dollar’s near-term yield appeal, but MUFG’s case concerns a longer-lasting drag from trade uncertainty and corporate caution.
A durable break below 1.3800 would make the bank’s underperformance call harder to defend.
Renewed tariff escalation or softer Canadian employment data could quickly return attention to economic risks and lift the US Dollar to Canadian Dollar forecast back towards recent highs.
The next moves will depend on Canadian employment and inflation figures, US tariff announcements, oil prices and incoming comments from BoC officials.
The central bank’s 28 October decision and Monetary Policy Report will be particularly important, alongside US payroll data and changes in Federal Reserve expectations.
Our currency coverage draws on live market data, official economic releases and published bank research.
