The Bank of Canada (BoC) is expected to keep its policy rate at 2.25% due to global economic uncertainty and the upcoming USMCA renegotiation in 2026. The recent increase in part-time jobs may weaken the Canadian dollar in the short term. The global market is adjusting, and many anticipate a 30 basis point rate hike from the BoC by October next year. Despite government support, the BoC is cautious, guided by its recent report highlighting a negative global economic outlook. The BoC is avoiding premature rate hikes for 2026, focusing on the importance of part-time employment numbers. This cautious approach raises risks for the Canadian dollar, particularly with uncertainties around the USMCA discussions. Today, the BoC is holding its policy rate at 2.25%, setting itself apart from more aggressive actions taken by other countries. This difference may lead to a weaker Canadian dollar in the near future. It would be wise to adjust derivative strategies to take advantage of this anticipated weakness against other major currencies. The BoC’s caution makes sense, especially when we look at the data from the November 2025 Labour Force Survey. There was a slight gain of 5,000 full-time jobs, but this was overshadowed by an increase of 45,000 part-time roles. With core CPI inflation steady at 2.6%, there is limited pressure for the BoC to make immediate changes. The upcoming USMCA talks are contributing to policymakers’ reluctance, especially as there are tensions around dairy and digital trade rules. This contrasts with the Reserve Bank of Australia, which has raised its cash rate to 4.85%, widening the gap in policy. This difference makes holding Canadian dollars less appealing. In the weeks ahead, we recommend buying out-of-the-money put options on the CAD or call options on the USD/CAD pair. This strategy provides a defined-risk opportunity to profit from a potential drop in the currency. The relatively low implied volatility may make these options cost-effective right now. This situation reminds us of 2014-2016 when the diverging policies of the Bank of Canada and the US Federal Reserve caused a consistent decline in the loonie. During that time, the USD/CAD exchange rate went from nearly equal to above 1.45. A similar, albeit possibly less severe, trend could happen as we approach 2026.

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