BBH’s markets strategy team expects Canadian inflation to cool in January, with the Bank of Canada expected to keep its policy rate unchanged at 2.25% for a period. The bank’s projections place inflation close to target in Q1.
Headline inflation is forecast at 2.4% year on year for a second month in a row. Core inflation, measured as the average of trimmed and median CPI, is expected at 2.55% year on year, compared with 2.6% in December.
In foreign exchange, USD/CAD is expected to trade within a 1.3500 to 1.3800 range in the near term. The article states it was produced using an artificial intelligence tool and reviewed by an editor.
With inflation easing as we look back at the start of 2025, the Bank of Canada is in a good position to keep its policy rate on hold. The actual data from last January showed headline inflation fell to 2.9%, a significant drop from the 3.4% we saw at the end of 2024. This reinforces the case for the Bank to remain steady at its 5.0% rate for some time.
This stability from the central bank suggests USD/CAD will remain well-defined within a tight range in the near-term. We expect the pair to continue trading largely between 1.3500 and 1.3800, a channel it respected for much of January 2025. Consequently, implied volatility on USD/CAD options should remain low, making it expensive to bet on large price swings.
For traders, this environment is ideal for strategies that profit from low volatility and time decay. Selling out-of-the-money strangles, perhaps with puts around 1.3450 and calls around 1.3850, could be an effective way to collect premium. The goal is for the options to expire worthless as the currency pair stays within this established range.
Alternatively, for those seeking more defined risk, an iron condor could be structured around the same price levels. This strategy also benefits from a lack of movement and allows us to generate income from the options premium. It effectively creates a profitable zone inside the expected 1.3500-1.3800 trading channel while limiting potential losses.
