The Bank of Canada is likely to keep its policy rate steady at 2.25% for the second time in a row. Analysts from Brown Brothers Harriman believe this rate is appropriate to keep inflation close to 2%. Trade tensions between the U.S. and Canada could affect the Canadian dollar’s outlook. The Bank of Canada will probably emphasize that “uncertainty remains high,” indicating no immediate plans to raise rates. This might cause markets to push back their expectations for a rate hike, which could weaken the Canadian dollar slightly.

Historical Context Of The Bank’s Cautious Stance

In 2025, the Bank of Canada consistently decided to keep its policy rate at 2.25%. The main reason for this cautious approach was the high uncertainty around trade, which made the bank wary of indicating any potential rate increases. This situation negatively affected the Canadian dollar as the market adjusted its expectations for rate hikes. The bank’s caution turned out to be well-placed, as it eventually lowered rates to 2.00% in the last quarter of 2025 to support a slowing economy. With December 2025’s inflation data falling short of the target at 1.8%, the market now expects a more dovish approach. This is quite different from the U.S. Federal Reserve, which has paused its easing cycle, leading to a divergence in policies. For traders in derivatives, this environment suggests betting on further weakness of the Canadian dollar, especially against the U.S. dollar. Buying USD/CAD call options for the upcoming months can be a low-risk way to profit from potential increases in this currency pair. The recent slowdown in Canadian job growth, with only 20,000 jobs added last month, adds to this bearish outlook.

Derivatives Trading Strategy

The ongoing uncertainty means that implied volatility in CAD options may be low. We recommend buying straddles before the next Bank of Canada meeting in March. This strategy allows traders to benefit from significant price movements in either direction, likely due to mixed economic data. Moreover, historical trends from 2015-2016, when the bank also cut rates amid economic uncertainty, showed a lengthy period of CAD underperformance. This history suggests that any rises in the Canadian dollar may be short-lived and should be taken as opportunities to adopt bearish positions. Traders can capitalize on these rises by selling CAD call options or setting up bear call spreads at more advantageous levels. Create your live VT Markets account and start trading now.

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