06:50 AM EDT, 09/17/2025 (MT Newswires) -- The Canadian dollar (CAD or loonie) is the worst-performing G10 currency on a year-to-date basis after the US dollar (USD) and is also the weakest in September, even slipping slightly against the greenback, MUFG said.

The fundamental backdrop has deteriorated and expectations for renewed rate cuts have increased, the bank wrote in a note to clients. Markets are now fully pricing a 25-basis-point cut by the Bank of Canada at its policy meeting Wednesday, after three straight holds and the first cut since March.

The BoC is scheduled to release its policy statement at 9:45 a.m. ET Wednesday.

Inflation data released Tuesday should allow the BoC to act, MUFG said. Headline annual consumer price growth ticked up to 1.9% in August from 1.7% but rose less than expected.

The median annual rate was unchanged at 3.1% and the trimmed mean eased to 3.0%. These readings aren't fully consistent with price stability but should reassure policymakers that tariff-related pressures aren't intensifying.

Prime Minister Mark Carney also announced in August that he would drop the 25% retaliatory tariff on a range of US imports, further easing inflation concerns.

What will be most compelling for a rate cut, according to MUFG, is the labor market. After a loss of 40,800 jobs in July, August data showed an additional 65,500 decline, pushing the unemployment rate to 7.1%, the highest since August 2021.

A 25-basis-point cut Wednesday would lower the policy rate to 2.50%, bringing cumulative easing this cycle to 250 basis points and making the BoC, alongside the Reserve Bank of New Zealand, the most aggressive G10 central bank in cutting rates, MUFG said.

Given the extent of easing and still-elevated inflation, Governor Tiff Macklem is unlikely to signal an urgent need for further cuts, though another reduction this year remains possible if labor weakness persists, the bank added.

With a cut fully priced in and with another nearly priced by year-end, MUFG doubts Wednesday's policy decision to cut with a balanced communication will fuel CAD selling. The FOMC decision later will be more important and while CAD should gain given the poor prospects for the US dollar, underperformance versus non-USD G10 is set to continue.