06:43 AM EST, 12/11/2024 (MT Newswires) -- USD/CAD has been broadly stable so far this week following the spike higher on Friday in response to the Canada jobs data, said MUFG.

The data had positive aspects with employment up a "solid" 50,500 in November, double the consensus, wrote the bank in a note to clients. However, expectations of another large 50bps cut from the Bank of Canada on Wednesday reflect the notable jump in the unemployment rate from 6.5% to a new cyclical high of 6.8%.

If you exclude the COVID-19 period, the unemployment rate is now at the highest level since January 2017. The jump in the unemployment rate underlined the increased labor supply that is helping to dampen upside wage inflation risks. The post-COVID jump in net immigration is unlikely to last but will ensure risks over the coming 12 to 24 months to inflation via wage growth remain more modest, stated MUFG.

The hourly wage rate for permanent employees on an annual basis slowed from 4.9% to 3.9% in November -- well below the market consensus of 4.7%.

This allows the BoC to counter some emerging risks of the economy underperforming expectations, according to the bank. Wage inflation risks are lower and gross domestic product growth slowed to just 1.0% on a quarter-over-quarter seasonally adjusted annual rate basis. Business investment fell nearly 30% on an annualized basis in Q3 and private-sector hiring is weakening relative to the public sector.

As a consequence, there seems limited risk in getting the monetary stance back to neutral and so cutting by a larger 50bps, pointed out MUFG. The OIS market indicates 45bps of cuts is priced for Wednesday so the BoC would be merely meeting close to what the market expects.

Canada's central bank is slated to release the policy statement at 9:45 a.m. ET Wednesday.

This would take the BoC policy rate to 3.25% with the markets then still expecting the policy rate to drop to 2.75%, added MUFG. That has been largely incorporated into the two-year swap spread which has widened out to just over 120bps, the widest in the data series on Bloomberg back to the Global Financial Crisis.

Covering five years of data the spread still suggests upside risks for USD/CAD from here.

However, markets appear quite well positioned for a 50bps cut and if that is what is delivered on Wednesday, the decision may well be accompanied by a degree of caution over the policy outlook ahead, noted the bank. 50bps on Wednesday means 175bps of cuts will have been delivered by the BoC since the start of June which is a much more pre-emptive easing cycle than all other G10 central banks to date.

As such, upside risks from here may stem more from United States President-elect Donald Trump and his policy announcements in January rather than the BoC's actions.

Still, even with a cautious message on Wednesday from the BoC, MUFG sees limited scope for the Canadian dollar (CAD or loonie) recovery and the bank estimates scope for USD/CAD extending further to around the 1.4500 level before any sustained recovery beyond Q1 can materialize.