RBC predicts that the Bank of Canada will not cut interest rates this week, even though the market believes there is a 95% chance of a cut. RBC sees signs of an economic rebound based on recent trade and manufacturing improvements from July and early Q3 data. Consumer spending appears stable, as shown by RBC card spending trends. The housing market is also looking positive, with August sales up compared to last year. Exports continue to be mostly tariff-free under the USMCA, while government support and limited layoffs help keep the economy stable. RBC points out a risk if the US economy slows down, but the Bank of Canada’s current rate of 2.75% gives it some flexibility. The Canadian dollar remains strong, benefitting from rising gold prices, although the USD/CAD exchange rate has moved within a 200-pip range in the last six weeks.

Head And Shoulders Chart Pattern

The daily chart suggests a possible head-and-shoulders top, targeting the year’s lows. Since January, the currency pair has fallen nearly ten figures. RBC suggests that this situation could shift based on upcoming inflation data. The market largely expects the Bank of Canada to cut rates this week, with futures markets indicating a 95% probability. However, signs of economic strength could create a big opportunity if the Bank decides to maintain its current rate. This difference in expectations presents a great chance for options traders to capitalize on a potential surprise that the wider market might overlook. If the Bank holds rates steady, the Canadian dollar could strengthen against the US dollar. The latest jobs report from Statistics Canada for August 2025 revealed a surprising gain of 32,000 jobs, which supports the view that the economy may not need an immediate rate cut. Traders who expect a “no cut” surprise might opt to buy near-term USD/CAD put options to profit from a sharp decline in the currency pair.

Market Volatility And Strategies

The current uncertainty has led to increased costs for Canadian dollar options. One-week implied volatility for USD/CAD has reached levels not seen since late 2024, when global slowdown fears were high. This situation opens up strategies that take advantage of this expensive volatility, such as an iron condor, for those who think the market reaction after the announcement will be less dramatic than expected. In terms of charts, we are monitoring a possible head-and-shoulders top for USD/CAD, a pattern indicating a downward move. A decision to maintain interest rates could trigger a break below the pattern’s neckline, confirming a bearish trend that has persisted throughout 2025. This technical setup favors trades that expect further strength in the Canadian dollar in the upcoming weeks. Even if a rate cut occurs, trading isn’t finished. The market will focus on the Bank’s statements for hints about future cuts. Traders may want to use longer-dated futures and options, like those expiring in December 2025, to prepare for a more aggressive rate-cutting cycle if the Bank expresses deeper concerns about the economy. Create your live VT Markets account and start trading now.

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