Rabobank’s RaboResearch Cross-asset Macro Strategist, Molly Schwartz, predicts that the Bank of Canada will keep the policy rate at 2.25% on January 28. Analysts surveyed by Bloomberg all agree with this forecast, as current economic indicators show inflation is cooling and there is little new GDP data. The Q4 business outlook indicates improved sentiment, but hiring is slowing, which may lead to layoffs. Despite these factors and the cooling inflation, no rate cuts are expected until 2026 due to ongoing trade disputes with the US.

Focus On Stability

With the Bank of Canada likely to maintain its policy rate at 2.25% this week, the main focus is on stability. The headline CPI figure for December 2025 dropped to 2.1%, comfortably within the Bank’s target range, which reduces the need for any changes. This general agreement suggests that the decision on January 28th won’t lead to much market volatility. Since a flat policy rate is expected throughout 2026, implied volatility on interest rate derivatives, such as options on BAX futures, should remain low. This environment makes strategies like selling straddles or strangles attractive, allowing traders to earn premiums from the anticipated lack of significant rate movements. Traders should seek out opportunities where option prices haven’t fully adjusted to this flat rate outlook. The major factor affecting the Canadian dollar isn’t monetary policy but the ongoing trade tensions with the US. The 15% tariff on softwood lumber and aluminum, imposed in late 2025, continues to hurt the Canadian economy, and monetary policy won’t resolve this issue. As a result, the Canadian dollar may weaken, making long positions in USD/CAD via forwards or options appealing.

Implications For Traders

This viewpoint is reinforced when considering the US, where the Federal Reserve has indicated a possible rate hike to tackle its own wage pressures. This difference in policy is likely to increase the interest rate gap favoring the US dollar, putting further downward pressure on the CAD. A trading strategy that involves buying USD/CAD call options could benefit from this trend in the coming months. The slowing economic activity is further evidenced by a 0.2% GDP contraction in the third quarter of 2025. Statistics Canada’s latest Labour Force Survey from early January reported a net loss of 5,000 jobs, highlighting a slowdown in business investment. For derivative traders, this suggests taking a cautious or bearish approach towards the broader Canadian market, making protective puts on the S&P/TSX 60 index a wise hedge. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now