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    Commerzbank’s Michael Pfister expects the Bank of Canada to keep interest rates steady.

    by VT Markets
    /
    Jan 28, 2026
    Commerzbank believes the Bank of Canada will keep interest rates steady for now. The Canadian economy is slowly recovering, but inflation is picking up. As a result, experts think this decision won’t significantly impact the Canadian Dollar. Previously, the Bank of Canada lowered interest rates to 2.25%, moving into an expansion phase. This step came after the impact of US tariffs on Canada’s economy. Since the market has already priced in this decision, the change in the interest rate is expected to have a limited effect on the CAD.

    Period of Stability

    Reflecting on 2025, we remember when the Bank of Canada set its key interest rate at 2.25%. The market anticipated this hold, leading to a quiet period for the Canadian dollar. Low expectations characterized last year. However, as of January 28, 2026, the calm environment is changing. New data from December 2025 indicates core inflation has risen to 2.8%, staying above the Bank’s 2% target for two straight quarters. Alongside a solid jobs report that saw unemployment drop to 5.2%, the idea of a slow and fragile recovery is being questioned. This trend suggests that the implied volatility on CAD options may be too low, reflecting last year’s stable conditions. We think the market isn’t fully accounting for a potential more aggressive stance from the Bank of Canada in its next meeting. This opens up chances for traders to buy straddles or strangles on USD/CAD, preparing for a significant market shift as future rate hike expectations change.

    Risk Reduction

    Strategies that worked well in late 2025, such as selling short-dated iron condors, now face much higher risk. We experienced a similar situation in early 2024 when the market was surprised by hawkish guidance, leading to a quick market adjustment. Thus, it’s important to reduce exposure to short volatility positions in the upcoming weeks. Create your live VT Markets account and start trading now.

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