TD Securities said the Bank of Canada’s January meeting minutes mostly matched the tone of the rate decision, which was slightly dovish. Policymakers said the current policy rate is appropriate. They also said it is slightly stimulative relative to the neutral range. Updated projections were broadly in line with October’s Monetary Policy Report.
The minutes also pointed to geopolitical uncertainty and how the Canadian economy might adjust under those conditions. They noted elevated uncertainty tied to the upcoming USMCA renewal and treated it as a risk to the outlook.
Bank Of Canada Rate Path
TD Securities said the Bank wants to keep flexibility when setting rates. It does not expect the Bank to rush into rate cuts if the near-term outlook weakens. It also sees potential rate hikes starting in 2027, if the output gap narrows this year.
The Bank of Canada is signaling it will stay on hold. It wants to keep its options open and avoid sudden moves. This suggests a stretch where interest rates do not change much in either direction. For traders, that likely means the Canadian dollar and short-term bond yields stay range-bound over the next several weeks.
Recent inflation data supports this wait-and-see approach. January 2026 CPI held at 2.9%. That is lower than the peaks seen in 2025, but it is still above the Bank’s 2% target. Because inflation remains sticky, the Bank has little reason to cut rates quickly, even if the economy is slowing.
At the same time, growth looks weaker. The latest January jobs report showed a small gain of just 5,000 positions. This kind of mixed data adds uncertainty and gives the Bank a reason to wait for more information. The tug-of-war between persistent inflation and softer growth is likely to keep the Bank on the sidelines through the spring.
Trading Implications For Cad
This “no-change” policy backdrop can favor selling volatility in the Canadian dollar. One example is selling short-dated CAD/USD strangles, which benefit if the pair stays within a set range. Implied volatility looks high given the Bank’s clear message that it is likely to wait.
In rates, it makes sense to be careful about positioning for near-term cuts when the Bank has signaled they are not close. In 2025, markets repeatedly priced in policy shifts too early. It is worth avoiding a repeat of that. Overnight Index Swaps still price a meaningful chance of a cut by mid-year, which may be too aggressive.
USMCA renewal talks are also a key risk, and the minutes explicitly highlighted them. Recent comments from U.S. trade officials suggest a tougher stance, which increases uncertainty for Canadian exports. This supports the idea of selling short-term volatility, while still holding some longer-dated options to hedge against a surprise outcome.
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