Rabobank’s global strategist Michael Every expects the Bank of Canada (BoC) to leave its policy rate unchanged at 2.25%, matching Bloomberg consensus and market pricing. The decision comes as inflation pressures linked to Hormuz persist, while uncertainty remains elevated around the United States-Mexico-Canada Agreement (USMCA) and US tariffs.
Those trade-related headwinds are weighing on Canadian business investment and consumer confidence, with uncertainty expected to endure even if the agreement is temporarily extended. The economy is described as fragile, with weak investment and a trade drag pointing towards a technical recession.
Bank of Canada Policy Outlook and Canadian Dollar Implications
We see the Bank of Canada holding its policy rate at 2.25% this month. After a series of rate cuts over the past two years, the central bank appears hesitant to move further amid conflicting economic signals. With GDP growth in the first quarter of 2026 coming in at a tepid 1.1% annualized, the bank is clearly in a wait-and-see mode.
This cautious stance from the Bank of Canada suggests weakness for the Canadian dollar. We anticipate the USD/CAD exchange rate will test higher levels, especially as the pair has already risen over 1.5% in the last month. We are looking at buying USD/CAD call options to position for a continued move upwards towards the 1.3800 level seen earlier this year.
Investment Strategy and Trade Risks
The Canadian economy looks fragile, with business investment declining for three straight quarters, pointing towards a potential technical recession. This weakness makes future interest rate hikes highly unlikely, despite recent inflationary pressures from oil prices, with Brent crude futures up 6% since early May. We are therefore considering trades that bet on rates staying low, such as selling out-of-the-money calls on three-month Canadian Bankers’ Acceptance futures (BAX).
Major uncertainty looms with the upcoming formal review of the USMCA trade agreement scheduled for this summer. Given the political climate, this event could trigger significant volatility in Canadian assets. Buying options to profit from a potential sharp move in the Canadian dollar, regardless of direction, could be a prudent strategy.
