The Governor of the Bank of Canada addressed questions about the bank’s decision to keep the interest rate at 2.75%. Despite unpredictable trade policies in the US, the Canadian economy is holding strong, showing modest growth in consumption expected for the third and fourth quarters. The Bank of Canada’s policy statement indicates uncertainty due to US tariffs. GDP growth and inflation expectations vary in different scenarios, but they mostly hover around 2% for the next few years. In the second quarter, Canadian exports dropped by about 25%, while imports fell by roughly 10%, widening the output gap.

Canadian Dollar Performance

The Canadian Dollar is weak right now due to ongoing buying of the USD, with USD/CAD trading above 1.3800 after the BoC’s decision. The Canadian Dollar shows varying strength against major currencies today, performing best against the Australian Dollar. The next interest rate decision by the Bank of Canada is likely to keep the rate at 2.75%. The Canadian Dollar has bounced back from earlier lows, showing that the market is still adjusting. Economic indicators and other factors could influence future projections. The Bank of Canada is remaining cautious, holding its interest rate at 2.75% for now. This careful approach comes from uncertainty over US trade policy and a domestic economy that is under pressure. For the time being, expecting a strong Canadian Dollar in the coming weeks might not be realistic.

Rate Differential Impact

The interest rate gap between Canada and the United States, with the Fed funds rate at 3.50%, makes holding US dollars more attractive. With USD/CAD above 1.3800, there’s a chance the Canadian dollar could decline further. We are exploring strategies that profit from a rising USD/CAD, such as buying call options. The significant 25% decline in our exports during the second quarter highlights the current vulnerability of our economy. This unpredictability leads to market swings, and we should expect this volatility to continue. Strategies that benefit from price movements, regardless of direction, are particularly appealing in this environment. Recent data supports this cautious outlook. Statistics Canada reported that June 2025 inflation was 2.1%, below the bank’s target. Looking back at the trade disputes from 2017-2019, we saw similar pressures that weakened the Canadian dollar. This historical pattern suggests we should brace for further challenges this quarter. Implied volatility on USD/CAD options has already reached a 12-month high, showing the market expects larger moves. With a hesitant central bank and weak economic data, the Canadian Dollar’s path appears to be downward. Buying Canadian dollar puts or setting up put spreads could be a smart move given this outlook. Create your live VT Markets account and start trading now.

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