Canada will soon release its inflation data for September, and it’s expected that the headline Consumer Price Index (CPI) will rise above 2.0%. However, the Bank of Canada (BoC) is more focused on core inflation measures, which are expected to stay around 3.0%. The BoC is prioritizing concerns about growth and job risks linked to tariffs rather than focusing solely on inflation. The USD/CAD exchange rate is forecasted to drop below 1.40, returning to levels seen in September by the end of the year. Despite recent strong job data, markets are anticipating a 19 basis point rate cut before the BoC meeting next week. The BoC’s third-quarter Business Outlook Survey indicates that US tariffs are causing uncertainty in investment and slow hiring.

The Bank of Canada Rate Cut Concerns

The BoC cut rates in September due to worries about the economy. There is ongoing debate about whether the risks around inflation are significant enough to keep rates unchanged on October 29. The Canadian dollar (CAD) is seen as weak compared to other G10 currencies, primarily because the risk of another rate cut and ongoing economic uncertainties limit its chance for gains. Still, if the US dollar weakens, USD/CAD may decline further by year’s end. Today’s inflation report for September isn’t likely to change the BoC’s approach. Even if headline inflation exceeds 2%, the BoC is expected to concentrate on core measures that remain stubbornly high near 3%. Their main concern is the economic growth and job risks caused by ongoing trade tariffs. Recent survey results confirm these concerns, showing businesses are postponing investments and hiring due to continuing uncertainty. This correlates with the Bank of Canada’s worries that prompted the rate cut in September. Ensuring economic support is clearly the bank’s priority. Markets are now heavily expecting another interest rate cut at the meeting on October 29. In fact, traders are almost certain that the BoC will ease next week. It would take an unexpected and strong piece of good news for the bank to hold rates steady.

Strategizing Currency Trades

For traders, this suggests positioning for a weaker Canadian dollar in the coming weeks. A simple strategy would be to buy put options on the CAD or call options on USD/CAD with expiry dates after the central bank meeting. This approach allows you to benefit from a rate cut while knowing your maximum risk is limited to the premium paid. We’ve seen this trend before, notably during the 2023-2024 period. During that time, core inflation often didn’t align with the central bank’s immediate moves, as the CPI-trim figures from Statistics Canada stayed near 3% for several months in early 2024. This indicates that the Bank of Canada may overlook stubborn core numbers when growth risks are considerable. While the US dollar is also expected to weaken, the Canadian dollar is perceived as the weaker currency. Therefore, promising trades may be found in currency crosses, such as going long on EUR/CAD or GBP/CAD. The loonie will likely struggle against other major currencies until the Bank of Canada signals the end of its easing cycle. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now