06:35 AM EDT, 03/13/2025 (MT Newswires) -- The Canadian dollar was the top performing G10 currency on Wednesday following the policy announcement and communication update from the Bank of Canada, said Mitsubishi UFG.

The 25bps cut was well telegraphed and fully priced, so the 10bps intra-day jump in the two-year swap rate was more down to the communications having a hawkish element, wrote the bank in a note to clients. The guidance element of the statement -- the last paragraph basically was what fueled some paring of rate cut expectations.

The BoC stated that "monetary policy cannot offset the impacts of a trade war" but then added, "what it can and must do is ensure that higher prices do not lead to ongoing inflation." The BoC would be "careful" in assessing the balance between downside risks to inflation from a weaker economy and upside risks stemming from rising costs.

This more nuanced interpretation is more reasonable from the standpoint of the BoC, given how far along it's in easing the monetary stance, stated MUFG. There is no need to appear in a panic given that the potential level of the neutral rate is in sight.

The cut Wednesday was the seventh consecutive cut with a cumulative total easing of 225bps. Governor Tiff Macklem also confirmed that a discussion on cutting by 50bps didn't take place. Prior to the cut Wednesday, the OIS market was implying 13bps of cuts were priced for the April meeting, assuming a 25bps cut took place. That pricing has shrunk slightly to 11bps, while the end-year cumulative total of easing dropped by 6bps, added the bank.

That's not a particularly big adjustment and while CAD was the top G10 performer, it advanced by a mere 0.4% versus the US dollar, pointed out MUFG. The Leveraged Funds' positioning currently shows close to a record short CAD position in data going back to 2006 -- so markets are certainly vulnerable to a squeeze, although that positioning is a better explanation perhaps of the limited CAD depreciation from current levels given the scale of negative uncertainties.

In reality, tariff risks are untradeable, according to MUFG. President Donald Trump has already postponed twice the introduction of a 25% tariff on all imports from Canada and Mexico, while how reciprocal tariffs would look is very unclear.

In reality, if Trump proceeds with a 25% tariff, a lot of those tariffs would be reversed under a true reciprocal tariff regime. But given the numerous factors Trump is using to set a reciprocal tariff, it's impossible to know what the end-game status would be, noted the bank.

With Canada playing hardball with Trump -- further retaliatory tariffs were announced Wednesday of $30 billion of tariffs on U.S. steel/aluminum-related goods imports to Canada -- there are higher risks of more aggressive action. If action is taken by the U.S. on April 2 and that action holds, USD/CAD will trade higher toward levels closer to 1.5000, but investors may be reluctant to trade the macro impact until they start to see the actual impact anecdotally or in the official data, said MUFG.