The Bank of Canada (BoC) has decided to keep the policy rate at 2.25%. Governor Tiff Macklem answered questions from reporters after the announcement. Canadian businesses are expected to adapt to US tariffs until the end of 2027. The recent decline in the US dollar is linked to geopolitical issues, impacting its typical status as a safe haven currency.

Economic Forecasts

The BoC forecasts a 1.1% growth for 2026 and 1.5% for 2027, with inflation expected to reach 2.0% in 2026. The nominal neutral interest rate remains between 2.25% and 3.25%. Due to trade changes, the Canadian economy is projected to grow 0.0% in Q4, increasing to 1.8% in Q1 2026. The Canadian Dollar has strengthened, trading higher against other major currencies, especially the Swiss Franc. Analysts predict that the BoC will keep the interest rate at 2.25% for now, maintaining inflation around the 2% target. Although the headline CPI rose to 2.4% year-on-year, core inflation decreased to 2.8%. The BoC continues to monitor inflation risks and is prepared to adjust policies if needed. The main role of the Bank of Canada is to manage monetary policy and keep prices stable, aiming for an inflation target of 1-3%. Both Quantitative Easing and Tightening influence the Canadian Dollar by affecting currency supply. Generally, higher interest rates help boost a nation’s currency by attracting global capital. By keeping its policy rate at 2.25%, the Bank of Canada shows a steady approach, providing stability for the Canadian dollar. The main concern now is external, centered around the end of the open trade era with the United States. This shift in structure supports a strategy that favors the CAD over the USD.

Analysis of US Dollar Weakness

The weakness of the US dollar is a significant concern, driven by geopolitical issues and worries about the Federal Reserve’s independence. This became evident in 2025 when the US Dollar Index (DXY) dropped from over 106 to nearly 101 in late 2025, indicating reduced confidence. This trend makes shorting the USD/CAD pair appealing, especially as it nears its 2025 lows around 1.3540. Given the BoC’s neutral position, it might be wise to use options strategies to manage risks from uncertainties in the US. Buying Canadian dollar call options or USD/CAD put options can allow for gains in CAD while limiting losses. Implied volatility may increase not from changes in Canadian policy but due to sudden political or trade events in the US. The impact of US tariffs is significant and expected to continue for years, slowing Canada’s growth potential to just 1.1% in 2026. In late 2025, Statistics Canada reported that exports to the US in key sectors were beginning to stagnate. This suggests that, although Canada’s economy is stable, it may not perform at its full potential due to external challenges. For traders focused on interest rates, the BoC’s outlook hints at low volatility in the short term. The market is only pricing in a minimal tightening of 10 basis points for the entire year. Selling short-dated volatility on Canadian interest rate futures could be a viable strategy, although the main risk would be an unexpected rise in inflation later in the year. Create your live VT Markets account and start trading now.

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