Canada faces a pivotal week with the release of several economic indicators and a key Bank of Canada rate decision.
On Monday, July manufacturing shipments are anticipated to rise by 1.8% from a previous 0.3%, while wholesale sales excluding petroleum are expected to increase by 1.3%. Existing home sales for August showed a prior increase of 3.8%.
Tuesday brings the August housing starts forecast at 273.2K compared to 294.1K previously. The monthly Consumer Price Index (CPI) is expected to rise by 0.1%, with an annual increase of 2.0%. Core measures show a median increase of 3.1% year-over-year and a trimmed rise of 3.0%.
Bank Of Canada Rate Decision
Wednesday will see data on international securities transactions, following a gain of $0.7B in July. The Bank of Canada’s rate decision is awaited, with an expected cut to 2.50% from 2.75%.
Retail data on Friday includes July retail sales, anticipated to drop by 0.9% from a 1.5% rise previously. Retail sales excluding autos previously increased by 1.9%. The Canadian economic scene is closely watched, with markets largely anticipating rate adjustments. Consumer resilience is evident, though potential effects from rising layoffs loom.
With the Bank of Canada widely expected to cut rates next Wednesday, the main event for us is not the cut itself but the Bank’s forward guidance. We’ve seen recent data showing Canada’s economy unexpectedly contracted by 0.2% in the second quarter of 2025, justifying the dovish move. Statistics Canada’s latest report also showed the unemployment rate rose to 6.2% in August, adding pressure on the Bank to ease policy.
Consumer Price Index Impact
Our attention first turns to Tuesday’s CPI report, which will set the tone for the rate decision. A hotter-than-expected inflation number could challenge the 90% probability of a rate cut, causing a spike in the Canadian dollar and short-term yields. We could use short-dated options on the loonie to position for a surprise, as implied volatility will be high heading into the print.
The primary trade revolves around the Bank’s statement on Wednesday. If the Bank signals more cuts are coming, we should be prepared for the Canadian dollar to weaken further, making call options on USD/CAD an attractive play. The Canadian dollar has already fallen 3% against the US dollar over the past two months as the market began pricing in this policy divergence with the US.
Given that a cut is almost fully priced in, the risk is asymmetric. A surprise hold, however unlikely, or a very hawkish statement signaling a long pause would cause an aggressive rally in the Canadian dollar. Traders might consider strategies that benefit from a sharp move in either direction if they believe the market is too complacent about the outcome.
Finally, we’ll watch Friday’s retail sales to gauge consumer health, which has been a key concern. A weak number would increase the 38% odds currently priced in for another rate cut in October, reinforcing the case for a weaker loonie into the fourth quarter. We remember how sticky core inflation was back in early 2024, and the Bank will want to avoid cutting too quickly if the consumer shows surprising strength.
