Interest Rate and Monetary Policy

In October, the Bank of Canada cut its policy rate by 25 basis points to 2.25%. They expect GDP growth of 1.1% in 2026 and 1.6% in 2027. Statistics Canada will release GDP figures at 13:30 GMT on Friday. The forecast is for a 0.5% growth in the third quarter, which may impact the Canadian Dollar’s performance. The Bank of Canada uses quantitative easing and tightening to guide the economy. GDP shows how the economy is doing and influences currency values and gold prices through its effect on inflation and interest rates. A rising GDP usually strengthens the national currency and adjusts interest rates, which influences investments and commodity prices like gold. Canada’s Q3 GDP grew at an unexpected annualized rate of 2.6%. This challenges the Bank of Canada’s recent decisions and makes their rate cut on October 29 seem premature. We now have to ask if it’s still possible for them to ease rates further in December. This surprising economic growth should boost the Canadian dollar. The market may begin to anticipate a more hawkish approach from the Bank of Canada, creating opportunities in CAD-related derivatives. We see a significant technical signal in the USD/CAD pair breaking below 1.4000.

Canada’s Economic Indicators

This perspective is backed by other recent data. Canada’s October Labour Force Survey showed a strong gain of 45,000 jobs, lowering the unemployment rate to 5.6%. This positive employment trend, along with robust GDP growth, indicates a strong economy. Traders might consider strategies to profit from a stronger CAD, at least in the short term. However, we must also look at the most recent CPI report for October, which shows inflation steady at 2.9%, just within the Bank of Canada’s target range. This creates a dilemma for the central bank, balancing a strong economy with controlled inflation. This uncertainty could increase market volatility, making options strategies like straddles appealing for capturing significant movements in either direction. With USD/CAD now below 1.4000, the next major support is at the 200-day moving average near 1.3922. Derivative traders might consider buying USD/CAD put options with strikes around 1.3950 to prepare for further declines. The premium paid for these options would represent the maximum risk of the trade. Another factor contributing to the Canadian dollar’s potential strength is the difference in monetary policy compared to the United States. Current market prices suggest more than a 60% chance that the U.S. Federal Reserve will start cutting rates in the first quarter of 2026. This sharply contrasts with the Bank of Canada, which may need to pause its easing efforts. We can recall the fast policy changes in 2022 when central banks quickly shifted to raising rates due to surprising economic data. This history indicates we should not underestimate the Bank of Canada’s readiness to adjust its course. Therefore, shorting the Canadian dollar could be risky until we have clearer signals from policymakers. Create your live VT Markets account and start trading now.

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