USD/CAD: Loonie's upside to prove less marked as markets adjust to conflict in Ukraine – MUFG

Ukraine conflict adds more uncertainty to the Bank of Canada (BoC) policy decision.  Economist at MUFG Bank still maintain a bullish outlook for the loonie but upside is less compelling in near-term.

Scaling back of BoC rate hike expectations ahead of Wednesday’s policy meeting

“There is more concern now that the higher price of oil will become more of a headwind for global growth going forward resulting in demand destruction. The Ukraine conflict is viewed as a stagflation shock. It creates a less favourable backdrop for oil currencies than if higher prices were primarily driven by the strengthening global economy.”

“The close proximity of the BoC’s upcoming policy meeting to the Ukraine conflict has increased uncertainty over the outcome. We believe that risks for Canadian rates are still skewed to the downside in the near-term. While it is not our base case scenario, there is a non-negligible risk that the BoC could delay raising rates as soon as this week. Even if the BoC hike rates the updated policy guidance could sound more cautious than current market pricing for just over 100bps of hikes by the summer.”