The Bank of Canada has decided to maintain its overnight rate at 2.75% amidst uncertainty in global trade caused by US tariffs. The decision came as markets had anticipated a 56% chance of a rate cut.
The US dollar to Canadian dollar exchange rate was near highs at 1.3810 just before the decision, with the next targets at 1.3827 and 1.3833. Global growth is projected to slow to around 2.5% by the end of 2025, recovering to approximately 3% by 2027 under current tariff conditions.
Canada’s Economic Outlook
Canada’s economy experienced a 1.5% GDP contraction in Q2 2025 due to decreased exports and trade disruptions. There is excess supply, a rise in unemployment to 6.9%, and easing wage growth.
In a scenario with current tariffs, GDP growth could recover to 1% later in the year. Inflation was at 1.9% in June, with upward and downward pressures potentially offsetting each other.
Future policy actions will consider ongoing economic and inflationary pressures. The bank emphasised its focus on preserving price stability while supporting economic growth amidst global uncertainties and trade challenges.
The Bank of Canada has held its interest rate at 2.75%, but the accompanying statement signals a strong possibility of a future cut. This dovish pivot, despite holding rates steady today, points toward a weaker Canadian dollar in the near term. We see this as an opportunity to position for a lower currency value.
Implications for Usd/Cad Strategy
The USDCAD pair is testing key resistance near the 1.3830 level, which includes its 100-day moving average. Given the increased likelihood of a rate cut, we should consider buying USDCAD call options with expirations in the coming months. This strategy allows us to profit from a potential upward break while limiting our downside risk.
Recent data reinforces this cautious outlook and the potential need for easing. The latest July employment report showed the unemployment rate ticking up to 7.1%, continuing the weakening trend from June’s 6.9% figure. Furthermore, the most recent CPI data for July came in at 1.7%, falling further below the central bank’s 2% target.
The market is already reacting to this forward guidance, moving beyond the 56% chance of a year-end cut priced in before the meeting. Overnight Index Swaps now suggest the odds of a 25-basis-point cut at the Bank’s next meeting in September have jumped to over 75%. This shows a strong conviction that easing is imminent.
We have seen this pattern before, such as with the US Federal Reserve back in late 2018 and early 2019. The Fed paused its rate hikes and signaled a shift, which was followed by actual rate cuts several months later. This historical precedent suggests the Bank of Canada’s current language is a reliable indicator of its next move.
The primary driver remains US trade policy, which is creating significant uncertainty for Canadian exports and business investment. Any negative news on tariffs or trade negotiations in the coming weeks will likely accelerate the Canadian dollar’s decline. We must monitor this situation closely as it is the main risk factor cited by the central bank.
