The Bank of Canada is expected to keep its policy rate steady at 2.25% for the second consecutive meeting. Analysts from Brown Brothers Harriman suggest that the bank will maintain its current stance, indicating the rate is suitable for maintaining inflation near 2%.
Trade uncertainties between the U.S. and Canada may impact the outlook for the Canadian dollar. The Bank of Canada is likely to highlight that “uncertainty remains elevated,” suggesting there is no immediate intention to increase rates. This could lead to markets delaying expectations for a rate hike, which may exert a modest downward pressure on the Canadian dollar.
Historical Context Of The Bank’s Cautious Stance
Looking back at 2025, we recall the Bank of Canada’s persistent on-hold bias, keeping its policy rate at 2.25%. The primary driver for this cautious stance was elevated uncertainty surrounding trade, which made the bank hesitant to signal any future hikes. This created a headwind for the Canadian dollar, as the market began to price out rate increases.
That caution was well-founded, as the bank eventually cut rates to the current 2.00% in the final quarter of 2025 to bolster a slowing economy. With the latest inflation data for December 2025 coming in below target at 1.8%, the market is now anticipating further dovishness. This contrasts sharply with the U.S. Federal Reserve, which has signaled a pause after its own easing cycle, creating a policy divergence.
For derivative traders, this environment suggests positioning for further Canadian dollar weakness, particularly against its U.S. counterpart. Buying USD/CAD call options for the coming months provides a defined-risk way to capitalize on a potential move higher in the currency pair. The recent slowdown in Canadian job growth, with only 20,000 jobs added last month, reinforces this bearish outlook.
Derivatives Trading Strategy
The continued uncertainty also means that implied volatility in CAD options may be undervalued. We believe purchasing straddles ahead of the next Bank of Canada meeting in March could be a valuable strategy. This would allow a trader to profit from a significant move in either direction, which is likely given the split economic data.
Furthermore, historical patterns from the 2015-2016 period, when the bank also cut rates amid economic uncertainty, showed a prolonged period of CAD underperformance. That precedent suggests that any rallies in the Canadian dollar are likely to be short-lived and should be seen as opportunities to enter bearish positions. Traders can use rallies to sell CAD call options or establish bear call spreads at more favorable levels.
