07:50 AM EDT, 09/27/2024 (MT Newswires) -- The US dollar (USD) has traded weaker on a broad basis of late as it became apparent that the Federal Reserve is willing to ease policy more forcefully than many other central banks because it cut policy rates by 50bps in the September meeting and some voting members signaled over the last few days that might happen again later in the year, said UBS.

The bank argues this will decrease rate differentials across the board as policy rates converge, eroding a crucial support pillar from the USD given inflows into high-yielding safe-haven United States government bonds might start to reverse over time.

Accordingly, UBS recently went Least Preferred on the USD.

The bank argues the Canadian dollar (CAD or loonie) can also benefit from this, though less so than other G10 peers. The latest market moves showed UBS once again how closely the CAD trails the USD. It has been the currency that appreciated the least against the greenback since the beginning of the month.

The bank doesn't expect a volatility surge in the pair in the foreseeable future but holds onto its view that the pair will edge slowly lower towards 1.32 by September 2025.

While the currencies have moved largely in sync, this hasn't exactly been the case for the economic situation: Canadian growth has slowed much more, inflation has come down faster and the labor market is easing much faster, too, added UBS. This speaks for more monetary easing by the Bank of Canada and with the Fed going big, it might well follow suit.

UBS expects Canada's central bank to cut rates in tandem over the coming months, and current market pricing suggests the same. This should solidify the bank's USDCAD forecasts for later in 2025.