Cancelo, a two-time league winner with City who was selected twice in the Premier League Team of the Year, moved to Bayern on an initial loan deal and the Bundesliga side can sign the defender permanently in the summer.
The Portugal international lost his place in City's starting lineup after the World Cup but brushed aside reports of a breakdown with Guardiola, who said he was happy with his squad even though Cancelo's departure leaves them light at the back.
"Next season, I don't know what happens. (He was) an incredible figure in the last two leagues we won. After the World Cup, we had a pre-season and decided to play, in some patterns, different," Guardiola told reporters on Friday.
"I liked what I watched. I gave more time to other players. His personality is he loves to play. He trains the best (but) the situation is he doesn't play much. In the last years, he was one of the players with the most minutes.
"He needs to play to be happy, we decided to let him go to Munich. If Bayern Munich want Joao it's because he's an exceptional player. I won't say a bad word. His work ethic, passion, skills - everyone knows it."
Guardiola said he had a chat with the club's director of football Txiki Begiristain about a possible replacement on deadline day but opted to wait a few months so they could potentially invest in the summer instead.
City are five points behind leaders Arsenal and Guardiola's side next play away at Tottenham Hotspur who are fifth in the standings.
With Arsenal having a game in hand, the pressure is on City to reel them in but Guardiola has lost all four of his visits to the Tottenham Hotspur Stadium in all competitions.
"Because they were better than us. We played decent games (but) missed penalties," he said.
"Now with Antonio Conte (in charge), the quality they have up front, the organisation - they're a tough opponent, always have been in the last few years.
"They've been fighting for Champions League (qualification), they've been in the top four for many, many years. So it's a tough place to go."
