Canada is gearing up for an important week as key economic data and a significant decision from the Bank of Canada are expected. On Monday, July manufacturing shipments are predicted to increase by 1.8%, up from 0.3% previously. Wholesale sales, excluding petroleum products, are set to rise by 1.3%. Existing home sales for August have already shown an increase of 3.8%. Tuesday’s forecast for August housing starts is 273.2K, a decrease from 294.1K. The Consumer Price Index (CPI) is expected to see a monthly rise of 0.1%, with a yearly increase of 2.0%. Core measures indicate a median rise of 3.1% year-over-year and a trimmed increase of 3.0%.

Bank Of Canada Rate Decision

On Wednesday, we will also get data on international securities transactions, which gained $0.7B in July. The Bank of Canada is anticipated to cut its rate to 2.50% from 2.75%. Retail data on Friday is expected to show July retail sales dropping by 0.9%, following a prior 1.5% rise. Retail sales excluding autos grew by 1.9%. The Canadian economic situation is under close scrutiny, with markets anticipating potential rate adjustments. Although consumers are showing resilience, concerns about rising layoffs remain. With expectations high for a rate cut from the Bank of Canada next Wednesday, the focus extends beyond the cut itself; investors are keen on the Bank’s forward guidance. Recent data revealed an unexpected 0.2% contraction in Canada’s economy during the second quarter of 2025, supporting a dovish outlook. Furthermore, Statistics Canada reported an increase in the unemployment rate to 6.2% in August, adding pressure for easing of policies.

Consumer Price Index Impact

Tuesday’s CPI report will be critical, setting the tone for the Bank’s rate decision. If inflation numbers are higher than expected, the 90% probability of a rate cut could be challenged, leading to a spike in the Canadian dollar and short-term yields. Traders may consider short-dated options on the loonie to prepare for any surprises due to high implied volatility. The main focus will be on the Bank’s statement on Wednesday. If more cuts are signaled, the Canadian dollar may weaken further, making USD/CAD call options appealing. Over the past two months, the Canadian dollar has already declined by 3% against the US dollar as the market reacts to this policy divergence. With a rate cut almost fully expected, the risk is not evenly balanced. A surprise hold or a very hawkish statement could trigger a strong rally in the Canadian dollar. Traders should think about strategies that capitalize on potential sharp movements in either direction, especially if they believe the market is overly complacent about the outcome. Lastly, Friday’s retail sales data will be crucial in assessing consumer health, a significant concern. A disappointing number could raise the current 38% chance of another rate cut in October, reinforcing the case for a weaker loonie heading into the fourth quarter. Recall that core inflation was quite persistent in early 2024, and the Bank may be cautious about cutting rates too quickly if consumers show unexpected strength. Create your live VT Markets account and start trading now.

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