Canadian Dollar Weakens in September, but A Bank of Canada Rate Hike Is Seen Ahead, MUFG Says

12:22 PM EDT, 10/01/2026 (MT Newswires) -- The Canadian dollar weakened against the US dollar in September, as the loonie, in line with most G10 currencies, came under pressure because the Federal Reserve's rate hike fueled expectations of further rises, widening the US-Canada interest-rate differential, according to MUFG Global Markets Research. September's Canadian economic data reinforced concerns about growth amid the ongoing US-Canada trade conflict, wrote MUFG in its Thursday note. Employment fell by 41,700 in August, marking the weakest reading since February, while activity indicators were broadly soft. Core consumer price index measures remained around 2.0% annually, providing little immediate impetus for the Bank of Canada to raise rates, said MUFG. However, the outlook has shifted since the BoC's early-September meeting, added the bank. Governor Tiff Macklem later warned about the risks of waiting too long to raise rates, with the next policy decision scheduled for Oct. 28. MUFG now expects the BoC to hike rates, given the upside risks to inflation. A sharp decline in energy prices, which appears unlikely, would be needed to alter that view. Meanwhile, ongoing geopolitical uncertainty could support crude prices, providing some support to Canada's terms of trade. Even so, the bank predicts the BoC to deliver less tightening than markets currently anticipate, which could temper the Canadian dollar's recovery as the US dollar weakens. MUFG's outlook also assumes the US-Canada trade conflict remains contained.