USD/CAD traded near 1.3735, with the next major resistance at the 200-day moving average of 1.3802. Brown Brothers Harriman reported the move alongside the Bank of Canada’s latest decision. The Bank of Canada held its overnight rate at 2.25% for a third straight meeting. It removed earlier guidance that the current policy rate is appropriate, which keeps a rate rise on the table.

Bank Of Canada Policy Signals

The BoC said growth risks are tilted to the downside, while inflation risks have risen due to higher energy prices. It added it will look through the war’s immediate impact on inflation, but would respond if high energy prices lead to broader, persistent inflation. Brown Brothers Harriman said it favours long Canadian dollar positions versus other currencies as a hedge against a persistent energy price shock. The report also noted Canada could benefit from improved terms of trade and has fiscal space to offset some demand weakness. Looking back at the situation in 2025, the Bank of Canada was signaling a hawkish turn with its policy rate at just 2.25%. That shift was a direct response to an energy price shock, forcing the central bank to open the door to rate hikes. This was the key moment when the market began pricing in a more aggressive BoC. As we saw through the second half of 2025, the BoC followed through on that warning as energy prices remained firm. The central bank raised its overnight rate several times, a move that provided significant support for the Canadian dollar. This is why USD/CAD fell from those 1.37 levels seen a year ago.

Market Focus Shifts To Rate Cuts

Today, the landscape is very different, with the BoC’s policy rate sitting at 4.75% for the past four months. Recent data shows headline inflation has successfully cooled to 2.9%, well off its peaks and moving closer to the bank’s target. West Texas Intermediate crude oil has also stabilized, now trading consistently in a range around $78-$82 per barrel. The market’s focus has now completely shifted from hikes to the timing of the first rate cut. While the BoC remains data-dependent, the conversation is about when they will start easing policy, not if they will tighten further. We are now pricing in a greater than 60% chance of a first cut by the July meeting. This evolving outlook suggests a reversal of the strategy that worked last year. Derivative traders should now consider positioning for a weaker Canadian dollar against the US dollar. The rate differential advantage that the CAD enjoyed is expected to narrow as the BoC begins its cutting cycle, likely ahead of the US Federal Reserve. Therefore, building long positions in USD/CAD through derivatives is becoming the prevailing view. We are looking at buying call options with strike prices around 1.3600 for the third quarter. This allows for capturing potential upside in the exchange rate as the BoC’s policy stance softens over the coming weeks. Create your live VT Markets account and start trading now.

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