Insights 
VT 
Bank of Canada Governor Tiff Macklem recently discussed the central bank’s monetary policy following a 25-basis-point rate reduction to 2.25%. The rate cut aims to support economic adjustment against US trade policies, though tariffs continue to impact Canada’s economic prospects negatively.
The Bank projects GDP by end-2026 will be 1.5% lower than earlier forecasts, with inflation expected to remain around 2%. It adjusted its growth expectations, seeing 2025 growth at 1.2% and 2026 growth at 1.1%. These revisions partly reflect weaker demand and the influence of US tariffs.
Canadian Economic Outlook
The Canadian labour market has softened with slow hiring, and inflation pressures have moderated. Despite the cuts, there are uncertainties around US trade policies, urging a cautious approach to the forecast. The Canadian Dollar performed strongly against various currencies post-rate cut.
The Bank of Canada released its decision, confirming expectations with the policy rate reduction. This follows another quarter-point cut in September, as the country faces economic challenges like slow growth and stubborn inflation, with the economy shrinking 1.6% in the second quarter. Inflation rose slightly in recent data, influencing the Bank’s meeting-by-meeting policy approach.
Key factors influencing the Canadian Dollar include interest rates, oil prices, the trade balance, and economic data like GDP and employment rates. The Bank of Canada’s adjustments and economic conditions have immediate impacts on the currency’s strength.
The Bank of Canada just cut its interest rate to 2.25%, a move we all saw coming. This was done to help the economy, which is struggling because of US trade tariffs. The bank has lowered its growth forecasts significantly, expecting GDP to be about 1.5% lower by the end of 2026 than it previously thought.
Impact on Currency and Markets
For derivative traders, this situation is complex because the Canadian dollar strengthened today even after the rate cut. This suggests the cut was already fully priced into the market, meaning easy bets against the CAD are gone. Future moves will now depend heavily on whether upcoming data is even worse than the current gloomy forecasts.
We can see the economic damage in the numbers from earlier in 2025. The economy shrank by 1.6% in the second quarter, and the unemployment rate is now at 7.1%, which is up significantly from the 6.2% we saw in the middle of 2024. The soft labor market and weak hiring are clear signs that the US trade policies are having a real impact across Canada.
Even with WTI crude oil prices holding firm above $85 per barrel, a level that would normally boost the Canadian dollar, the currency has been weak. This shows that concerns about Canada’s domestic economy and the uncertainty over US trade are outweighing the support from oil prices. We need to watch this relationship closely, as any drop in oil could accelerate CAD weakness.
The central bank itself admits the range of possible outcomes is wider than usual, creating an environment of high uncertainty. This points towards higher volatility in the weeks ahead, especially for USD/CAD options. Implied volatility has been climbing, suggesting traders are bracing for a large price swing as we await more clarity on US trade policy.
Therefore, we should watch key technical levels and incoming data very closely. The USD/CAD pair holding above its 200-day moving average near 1.3950 remains a critical support level. A break below this could signal a change in sentiment, while a move towards the October peak of 1.4080 would confirm that the Canadian dollar’s underlying weakness is taking hold again.
