RBC predicts the Bank of Canada will not cut interest rates this week, despite the market’s 95% expectation for a cut. RBC believes economic indicators suggest a rebound, pointing to July trade and manufacturing gains, alongside stronger early Q3 data. Consumer demand seems steady, with RBC card spend tracking reflecting this. Additionally, housing shows positive signs, with August sales up year-on-year.
Exports remain mostly tariff-free under the USMCA, while fiscal supports and limited layoffs contribute to economic stability. RBC identifies a potential risk if the US economy slows further, but the Bank of Canada has room to manoeuvre, with its current rate at 2.75%. The Canadian dollar remains strong, benefiting from rising gold prices, although USD/CAD has fluctuated within a 200-pip range over the past six weeks.
Head And Shoulders Chart Pattern
The daily chart hints at a potential head-and-shoulders top, with a target at the year’s lows. Since the start of the year, the pair has dropped nearly ten full figures. RBC suggests this positioning may change, contingent on upcoming inflation data.
The market is almost certain the Bank of Canada will cut rates this week, with futures markets showing a 95% probability priced in. However, we see evidence of economic resilience, creating a significant opportunity if the Bank decides to hold. This disagreement is a prime setup for options traders who can position for a potential surprise that the broader market is ignoring.
If we believe the Bank will not cut rates, the Canadian dollar would likely rally strongly against the US dollar. The latest Statistics Canada jobs report for August 2025 showed a surprise gain of 32,000 jobs, adding credibility to the idea that the economy doesn’t need an immediate cut. Traders anticipating a “no cut” surprise could purchase near-term USD/CAD put options to profit from a sharp downward move in the currency pair.
Market Volatility And Strategies
This high level of uncertainty has driven up the cost of Canadian dollar options. We are seeing one-week implied volatility for USD/CAD reaching levels not seen since the sharp global slowdown fears back in late 2024. This environment allows for strategies that sell this expensive volatility, such as an iron condor, for those who believe the post-announcement move will be less dramatic than the options market suggests.
On the charts, we are watching a potential head-and-shoulders top forming for USD/CAD, a pattern that signals a move lower. A decision to hold interest rates steady could be the catalyst that breaks the pattern’s neckline, confirming the bearish trend that has been in place for most of 2025. This technical setup supports trades that anticipate further Canadian dollar strength in the coming weeks.
Even if the expected rate cut happens, the trade isn’t necessarily over. The market’s focus will immediately shift to the Bank’s statement for clues about future cuts. Traders can use longer-dated futures and options, such as those expiring in December 2025, to position for a more aggressive cutting cycle if the Bank signals deeper concerns about the economy.
