The Bank of Canada has decided to keep its overnight rate at 2.75% as global trade remains uncertain due to US tariffs. This decision surprised markets, which had expected a 56% chance of a rate cut. Before the announcement, the exchange rate for the US dollar to the Canadian dollar was high at 1.3810, with the next targets being 1.3827 and 1.3833. It is expected that global growth will slow to about 2.5% by the end of 2025 and rebound to around 3% by 2027, assuming tariffs remain in place.

Canada’s Economic Outlook

Canada’s economy shrank by 1.5% in GDP during the second quarter of 2025, mostly due to reduced exports and trade issues. There is excess supply, unemployment has risen to 6.9%, and wage growth is slowing. If tariffs stay the same, GDP growth might bounce back to 1% later this year. Inflation was recorded at 1.9% in June, with various pressures balancing each other out. Future policies will be shaped by ongoing economic and inflation challenges. The Bank of Canada is focused on maintaining price stability while fostering economic growth in these uncertain times. While the Bank has kept its interest rate at 2.75%, their statement suggests a strong chance of a future cut. This shift towards a more dovish stance, despite holding rates steady, indicates a weaker Canadian dollar ahead. This situation presents an opportunity for us to prepare for a fall in currency value.

Implications for Usd/Cad Strategy

The USDCAD pair is testing crucial resistance around the 1.3830 mark, also near its 100-day moving average. Given the rising likelihood of a rate cut, it might be wise to buy USDCAD call options with expiration dates in the coming months. This would allow us to benefit from a possible price increase while limiting our risks. Recent data supports this cautious approach and indicates a need for easing. The July employment report showed the unemployment rate rising to 7.1%, following June’s rate of 6.9%. Additionally, the latest Consumer Price Index (CPI) data for July was 1.7%, falling short of the Bank’s 2% target. The market is already responding to forward guidance, moving beyond the 56% chance of a rate cut by the year’s end that was expected before the meeting. Overnight Index Swaps now show odds of over 75% for a 25-basis-point cut at the next meeting in September, indicating a strong belief that easing is on the way. We have observed a similar trend before, like with the US Federal Reserve in late 2018 and early 2019. When the Fed paused rate hikes and hinted at a shift, actual rate cuts followed months later. This historical pattern suggests that the Bank of Canada’s current messaging is a reliable indicator of its next steps. The primary influence on the outlook remains US trade policy, which is introducing substantial uncertainty for Canadian exports and business investments. Any negative developments regarding tariffs or trade talks in the coming weeks could hasten the decline of the Canadian dollar. We need to keep a close watch on this situation, as it is the main risk highlighted by the central bank. Create your live VT Markets account and start trading now.

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