Rabobank’s RaboResearch Cross-asset Macro Strategist, Molly Schwartz, projects that the Bank of Canada will keep the policy rate steady at 2.25% on January 28. Analysts surveyed by Bloomberg unanimously agree with this expectation, as current economic indicators show cooling inflation and a lack of new GDP data.
The Q4 business outlook showed improving sentiment; however, hiring is slowing, with potential layoffs. Despite these circumstances and cooling inflation, rate cuts are not predicted for 2026 due to ongoing trade conflicts with the US.
Focus On Stability
With the Bank of Canada widely expected to hold its policy rate at 2.25% this week, the immediate focus is on stability. We saw the headline CPI figure for December 2025 drop to 2.1%, sitting comfortably within the Bank’s target range and removing any pressure for a change. This widespread consensus means the January 28th decision itself is unlikely to create much market volatility.
Given the outlook for a flat policy rate throughout 2026, implied volatility on interest rate derivatives, such as options on BAX futures, should remain suppressed. This environment makes strategies like selling straddles or strangles appealing, as it allows traders to collect premium from the expected lack of significant rate moves. Traders should look for opportunities where option prices have not yet fully adjusted to this stagnant rate view.
The main driver for the Canadian dollar is not monetary policy but the ongoing trade tensions with the United States. The 15% tariff imposed on our softwood lumber and aluminum in late 2025 continues to weigh on the economy, and monetary policy cannot fix this problem. This ongoing pressure suggests a weaker Canadian dollar, making long positions in USD/CAD via forwards or options look attractive.
Implications For Traders
This view is strengthened when we look at the United States, where the Federal Reserve has signaled a potential rate hike to address its own wage pressures. This policy divergence is likely to widen the interest rate differential in favour of the US dollar, adding further downward pressure on the CAD. A trade structure buying USD/CAD call options could capitalize on this expected trend over the coming months.
The weakening economic activity, confirmed by the slight 0.2% GDP contraction we saw in the third quarter of 2025, also has implications for equities. Statistics Canada’s latest Labour Force Survey from early January showed a net loss of 5,000 jobs, a clear sign of slowing business investment. For derivative traders, this suggests a cautious or bearish stance on the broader Canadian market, making protective puts on the S&P/TSX 60 index a prudent hedge.
