Insights 
VT 
Canada is set to release its inflation figures for September, with expectations that the headline CPI will rebound above 2.0%. However, the Bank of Canada (BoC) is more concerned with core measures, which are anticipated to remain around 3.0%. The BoC is currently more focused on growth and job risks due to tariffs rather than on inflation.
The USD/CAD exchange rate is predicted to fall below 1.40, reverting to September levels by year-end. Despite recent strong jobs data, markets have priced in a 19 basis point easing before the BoC meeting next week. The BoC’s third-quarter Business Outlook Survey suggests a continued impact from US tariffs, resulting in investment uncertainty and subdued hiring.
The Bank of Canada Rate Cut Concerns
The BoC’s recent rate cut in September reflects its concerns about these economic factors. There is still discussion on whether inflation risks are strong enough to hold rates steady on 29 October. The CAD is considered unfavourable among G10 currencies due to high chances of an October rate cut and ongoing economic uncertainties, restricting its potential for gains against other currencies. Despite these factors, USD weakness could drive USD/CAD to lower levels by year’s end.
Today’s inflation report for September isn’t expected to change the central bank’s direction. Even if headline inflation has bounced above 2%, we see the Bank of Canada focusing on core measures that are staying stubbornly high around 3%. The bank’s real concern is the risk to economic growth and jobs from ongoing trade tariffs.
The recent Business Outlook Survey confirmed these fears, showing that businesses are delaying investments and hiring due to prolonged uncertainty. This echoes the same worries the Bank of Canada mentioned when we saw them cut rates back in September. The bank is clearly signaling that supporting the economy is its top priority right now.
Markets are now heavily anticipating another interest rate cut at the upcoming meeting on October 29th. In fact, derivative pricing implies traders are almost certain of an easing move next week. It would take a very strong and unexpected piece of good news for the bank to decide to stay on hold.
Strategizing Currency Trades
For traders, this points towards positioning for a weaker Canadian dollar in the coming weeks. One straightforward strategy is to buy put options on the CAD, or call options on USD/CAD, with expiry dates set for after the central bank meeting. This allows you to profit from a rate cut while defining your maximum risk to the premium paid.
We have seen this pattern before, particularly when looking back at the 2023-2024 period. During that time, core inflation often remained disconnected from the central bank’s immediate actions, as seen when CPI-trim figures from Statistics Canada hovered near 3% for months in early 2024. This shows that the Bank of Canada is willing to look past sticky core numbers when growth risks are high.
While the US dollar is also expected to weaken, the Canadian dollar is viewed as the weaker of the two. This means the most promising trades may be in the currency crosses, such as going long on EUR/CAD or GBP/CAD. The loonie is unlikely to find much strength against other major currencies until the Bank of Canada signals its easing cycle is over.
