Rabobank projects the Bank of Canada might implement a final 25 basis point rate cut, possibly during the October meeting, but the likelihood remains uncertain as the central bank maintained its policy rate at 2.75% in July.
Rabobank foresees the current US-Canada interest rate disparity of 175 basis points reducing to about 75 basis points by 2026, due to the Federal Reserve’s faster rate-cutting trajectory. By this time, the Bank of Canada is predicted to arrive at a terminal rate of 2.50%.
Impact On Usd Cad Currency Pair
The narrowing of the rate gap is expected to influence the USD/CAD currency pair. Rabobank forecasts that it will predominantly trade within the 1.34 to 1.36 range, a range noted for substantial price congestion throughout 2023 and 2024.
We believe the interest rate difference between the US and Canada is set to shrink over the next year. The Bank of Canada is signaling one final rate cut, possibly in October, while the Federal Reserve is expected to begin its own cutting cycle later. This dynamic should keep the USD/CAD exchange rate contained within a predictable range.
Looking at recent numbers from today, August 7, 2025, Canada’s July inflation reading came in at 2.6%, slightly below expectations. This supports the view that the Bank of Canada, which held its rate at 2.75% last month, has room for one final cut. Meanwhile, the latest US jobs report showed unemployment inching up to 4.1%, adding to the case for future Federal Reserve easing.
Derivative Trading Strategies
For derivative traders, this suggests that selling volatility could be a favorable strategy in the coming weeks. With the pair expected to trade between 1.34 and 1.36, options strategies like iron condors or selling strangles could prove effective. Three-month implied volatility for USD/CAD has already compressed to 6.5%, showing the market is pricing in a period of lower price movement.
We are seeing a similar market structure to what happened back in 2023 and 2024, when this 1.34-1.36 zone acted as a strong magnet for price. As the USD/CAD currently trades near 1.3580, traders might consider using bear call spreads to capitalize on resistance at the top of this range. Any moves above 1.36 are likely to be short-lived until the interest rate outlook fundamentally changes.
