TD Securities expects the Bank of Canada to move slowly even if a tariff deal is reached, as policymakers wait for clearer evidence on how lower tariffs feed through to exports and output. The next key trade data are due in November, which could shape the BoC’s assessment of external demand and domestic momentum.
TD forecasts the BoC will keep rates on hold through 2026 and then deliver its first hike in January, even as the output gap narrows. The central bank has treated trade tensions as a downside risk, and in June said new trade restrictions on Canada could lead it to cut rates again; oil-price spillovers remain a consideration, although excess supply is cited as a factor that could support a patient stance.
Derivative Market Positioning Amid a Protracted Pause
We believe derivative traders should position for a prolonged pause from the Bank of Canada, as policymakers are highly unlikely to budge before the end of the year. Despite recent buzz around a potential weekend trade agreement, the central bank will want to see hard export data, which will not print until November. This means interest rate markets may be mispricing the likelihood of any near-term policy shifts.
We suggest focusing on short-term Canadian Overnight Repo Rate Average (CORRA) futures, targeting contracts expiring in late 2026. With the central bank expected to stay on hold until January 2027, selling implied volatility on December contracts offers an attractive risk-reward profile. Historically, during similar periods of central bank hesitation, overnight index swaps (OIS) have seen significant premium compression as the market aligns with a flat rate outlook.
Yield Spread & FX Opportunities as BoC Remains on Hold
We also see a compelling opportunity in trading the yield spread between Canadian and U.S. government debt. With Canada’s economy facing excess supply—highlighted by recent GDP growth hovering around 1.2%—the Bank of Canada has plenty of room to stay patient. Traders can exploit this by entering bearish Canadian Dollar (CAD) options as the yield differential spreads in favor of the U.S.
The real catalyst for market movement will not arrive until November when the first comprehensive trade figures post-tariff talks are released. Until then, we expect rate hike expectations to remain firmly anchored, making range-bound strategies highly effective for the coming weeks. We recommend maintaining a neutral-to-dovish bias on Canadian rates and letting time decay work in favor of short-volatility positions.
