BBH’s markets strategy team expects Canadian inflation to cool in January. They also expect the Bank of Canada to keep its policy rate unchanged at 2.25% for a while. In BBH’s projections, inflation is close to the target in Q1.
Headline inflation is forecast at 2.4% year over year for a second straight month. Core inflation (the average of trimmed and median CPI) is expected at 2.55% year over year, down slightly from 2.6% in December.
In foreign exchange, USD/CAD is expected to trade in a 1.3500 to 1.3800 range in the near term. The article says it was produced using an artificial intelligence tool and reviewed by an editor.
Looking back to the start of 2025, easing inflation puts the Bank of Canada in a good position to keep rates on hold. Last January’s data showed headline inflation fell to 2.9%, down sharply from 3.4% at the end of 2024. This supports the case for the Bank to keep its rate steady at 5.0% for some time.
If the central bank stays steady, USD/CAD may also stay in a tight range in the near term. We expect the pair to trade mostly between 1.3500 and 1.3800, a range it followed for much of January 2025. As a result, implied volatility on USD/CAD options should stay low. That makes it costly to bet on big price moves.
For traders, this kind of market can suit strategies that benefit from low volatility and time decay. One approach is to sell an out-of-the-money strangle, such as puts near 1.3450 and calls near 1.3850, to collect premium. The aim is for both options to expire worthless if the pair stays in range.
If you want more defined risk, you could use an iron condor around the same levels. This strategy also benefits from limited price movement and earns income from option premium. It creates a profit zone inside the expected 1.3500–1.3800 channel while capping potential losses.
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