Rabobank believes the Bank of Canada may cut its rate by 25 basis points soon, perhaps in October. However, this is uncertain since the central bank kept its rate at 2.75% in July. Rabobank predicts that the current interest rate gap between the US and Canada, which is 175 basis points, will shrink to about 75 basis points by 2026. This change is due to the Federal Reserve expected to cut rates more quickly. By then, the Bank of Canada should have a final rate of 2.50%.

Impact On USD/CAD Currency Pair

The smaller rate gap will likely affect the USD/CAD currency pair. Rabobank forecasts this pair will mainly stay in the 1.34 to 1.36 range, a zone where prices have fluctuated significantly in 2023 and 2024. We expect the interest rate difference between the US and Canada to decrease in the next year. The Bank of Canada might make one last cut in October, while the Federal Reserve is likely to start its own rate cuts later. This situation should keep the USD/CAD exchange rate relatively stable. On August 7, 2025, Canada’s inflation rate for July was 2.6%, which is slightly lower than expected. This supports the idea that the Bank of Canada can still reduce rates. Meanwhile, the US jobs report showed unemployment rising to 4.1%, reinforcing the prediction for future Federal Reserve rate cuts.

Derivative Trading Strategies

For traders in derivatives, selling volatility could be a smart strategy in the coming weeks. With the USD/CAD expected to stay between 1.34 and 1.36, options strategies like iron condors or selling strangles may work well. The three-month implied volatility for USD/CAD has already dropped to 6.5%, indicating a forecast of lower price fluctuations. The market is showing a pattern similar to what occurred in 2023 and 2024, when the 1.34-1.36 range strongly attracted prices. As USD/CAD is currently near 1.3580, traders might think about using bear call spreads to take advantage of resistance at the upper end of this range. Any moves above 1.36 are likely to be temporary unless the interest rate outlook changes significantly. Create your live VT Markets account and start trading now.

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