The Bank of Canada’s December meeting minutes reveal growing confidence in the economy’s resilience despite high uncertainty. Policymakers noted the global economy is performing better than expected, with strong US consumer spending and AI investment, though tariff risks persist.
In Canada, revised data shows stronger economic footing in 2025, with GDP growth at 2.6% in Q3 due to reduced imports. The labour market improved, with unemployment at 6.5%, though most job growth is in part-time positions. Inflation cooled to 2.2% in October, with core inflation around 2.5%.
Trade Policy Risk
The Governing Council identified trade policy as a key risk, especially the upcoming CUSMA review. Despite less economic slack, the Bank decided to maintain the policy rate at 2.25%, stressing readiness to adjust if the outlook shifts. The BoC’s role includes setting interest rates to manage inflation, which affects the Canadian Dollar’s strength.
Quantitative easing (QE) is a tool used in severe cases, usually weakening the CAD, whereas quantitative tightening (QT) is the reverse, often strengthening the CAD. QE was utilised during the 2009-11 financial crisis. Quantitative tightening occurs during recovery to curb rising inflation and typically bolsters the CAD.
Given the Bank of Canada’s cautious pause, we see a market defined by uncertainty, which points to short-term volatility over a clear directional trend. The Bank is holding its policy rate at 2.25% and has given no strong signal about its next move, meaning the Canadian dollar will likely react sharply to incoming economic data. This data-dependent stance suggests that any position taken now must be flexible and ready to adapt.
We will be watching the upcoming November Consumer Price Index (CPI) report very closely, which Statistics Canada is scheduled to release next week. After October’s inflation rate eased to 2.2%, another soft reading would reinforce the Bank’s patient stance and could weigh on the Canadian dollar. Conversely, any surprise uptick, similar to the stubbornness we saw in core inflation throughout 2024, would quickly revive talk of a potential rate hike and send the currency higher.
Upcoming Labour Force Survey
The next Labour Force Survey, due in the first week of January, is another critical event for the market. While unemployment fell to 6.5% recently, the minutes highlighted mixed hiring quality, a trend we’ve seen periodically, like in the late-2023 reports which showed gains in part-time work offsetting full-time losses. A strong report with solid full-time job growth would signal economic resilience, while another weak report would confirm the Bank’s concerns and limit any upside for the loonie.
This high level of uncertainty makes options strategies particularly attractive over the coming weeks. We believe buying volatility through straddles or strangles on USD/CAD futures could be a prudent way to position for a significant price swing without betting on the direction. Such a strategy would profit from a sharp move following either the upcoming inflation or jobs data release, regardless of whether the news is good or bad.
Looking further ahead, the upcoming CUSMA review in July 2026 is a major risk on the horizon that the Bank explicitly mentioned. While it is still months away, we can begin to position for potential political friction by examining longer-dated derivatives. Acquiring long-term put options on the Canadian dollar could serve as a valuable hedge against the rising uncertainty that will surely precede the trade agreement review.
