06:12 AM EDT, 07/24/2024 (MT Newswires) -- The Canadian dollar (CAD or loonie) has weakened ahead of Wednesday's Bank of Canada (BoC) policy decision due at 9:45 a.m. ET, said Mitsubishi UFG.

It has resulted in USD/CAD rising back closer to the year-to-date (YTD) high from April 16 at 1.3846 after attempting and failing to break below support from the 200-day moving average at just below the 1.3600 earlier this month, wrote the bank in a note to clients.

The external backdrop has been unfavorable for the Canadian dollar in recent weeks as investors have turned more risk-averse and the price of oil has dropped back towards YTD lows reflecting in part renewed concerns over the global growth after China's economy lost growth momentum in Q2, stated MUFG. The releases of the latest PMI surveys from Europe (eurozone and United Kingdom) for July will also be watched closely to see if the pullback in business confidence at the end of Q2 has continued at the start of Q3.

At the same time, the Canadian rate market remains confident that the BoC will deliver back-to-back rate cuts on Wednesday, pointed out the bank. There are currently around 22bps of cuts priced in for Wedesday's BoC policy meeting and around 64bps of cuts by year-end indicating that the BoC is expected to continue lowering rates through the rest of this year.

At the last policy meeting, Governor Tiff Macklem indicated that the BoC is comfortable to keep cutting rates ahead of the United States Federal Reserve and policy divergence isn't yet at the point where it could become a problem.

MUFG expects the BoC to take the opportunity to lower rates further on Wednesday given it is already well priced in. Even though inflation has picked up in recent months, it has been moving towards the BoC's target this year and the policy rate rate remains at restrictive levels.

The recent jump in the unemployment rate to 6.4% in June should provide reassurance as well that domestic inflation pressures are likely to ease further, added the bank. It would be a much bigger surprise if the BoC disappointed financial market expectations on Wednesday and left rates on hold which would trigger a bigger CAD reaction.

There has been a significant pick-up in short CAD positions held by Leveraged Funds in recent months built on the back of monetary policy divergence expectations, according to MUFG.