Canadian Dollar Outlook Remains Cautious as Bank of Canada Seen Dovish Amid Trade Risks, UBS Says

The recent rise in the US dollar against the Canadian dollar has been driven by a widening divergence in interest rate expectations between the Federal Reserve and the Bank of Canada, making next week's BoC meeting a key focus for the currency pair, according to UBS in a Friday note. Despite Canadian inflation accelerating to more than 3% annually, UBS said the BoC remains one of the least likely major central banks to tighten policy, as persistent weakness in the Canadian economy continues to weigh on the outlook. The labor market appears to be stabilizing, with Friday's Labour Force Survey (LFS) set to provide additional clarity on the underlying momentum, said the bank. The LFS is due out at 8:30 a.m. ET. "We expect the BoC to leave its policy stance unchanged next week," wrote UBS in its note. Canada's central bank is scheduled to release its policy decision on Wednesday. Tensions over the United States-Mexico-Canada Agreement on trade, or USMCA, continue to cloud the outlook for Canadian growth and the currency, the bank added. UBS said it's bearish on the Canadian dollar in the near term, expecting USD/CAD to stay elevated before easing toward 1.40 early next year..