Standard Chartered expects the Bank of Canada to leave its policy rate unchanged at 2.25% and to push back a 25bps reduction until December. The bank points to a rebound in Q2 growth, which it argues reduces the case for near-term monetary easing. Policymakers may also prefer to wait for additional data before judging how the latest US tariffs feed through to Canadian growth and inflation.
The report flags downside risks to activity from the recent tariff escalation, while also suggesting there are high odds of trade de-escalation. It adds that an “insurance” cut could still be justified at the next decision if the BoC opts to shield the economy from an expected tariff shock. Separately, it says market pricing implies about 65bps of hikes by mid-2027, a path the bank views as overstated.
Market Implications and Trading Strategies
We suggest derivative traders prepare for the Bank of Canada to hold its key policy rate at 2.25% in the upcoming meeting before delivering a 25-basis-point cut in December. While Q2 GDP growth rebounded to a resilient annualized rate of 1.8%, the looming threat of US tariffs creates an unpredictable environment. Waiting for clearer inflation and trade data before easing seems to be the central bank’s preferred path.
We believe current market pricing, which factors in about 65 basis points of rate hikes by mid-2027, is highly excessive. Traders should look to exploit this mispricing by positioning for lower yields through Canadian short-term interest rate futures. Shorting these implied hikes offers a favorable risk-reward profile as economic realities sink in.
Risk Management and Outlook for Canadian Assets
In the currency options market, we recommend buying USD/CAD call options to hedge against sudden tariff-induced volatility. Historically, during the 2018 trade disputes, the Canadian Dollar weakened by over 5% against the US Dollar in a matter of weeks. With the current exchange rate hovering near 1.36, protecting against a sudden upward move in USD/CAD is highly prudent.
Recent July inflation figures showing Canadian CPI steady at 2.1% suggest that domestic price pressures remain firmly under control. This stable backdrop means the central bank does not need to rush into restrictive policy, further undermining the hawkish market consensus. We expect the premium on hawkish bets to decay rapidly over the coming weeks as economic reality sets in.
