BofA: What we expect from the BOC and USD/CAD at this week’s meeting

BofA expects the Bank of Canada (BoC) to cut its policy rate by 25bps to 2.75% at this week’s meeting, citing economic uncertainty from ongoing tariff risks. With inflation under control, the BoC is likely to prioritize growth support. However, the FX impact on USD/CAD is expected to be limited, as markets remain focused on trade negotiations and election uncertainty.

Key Points:

1️⃣ BoC to Cut 25bps, Terminal Rate Seen at 2.5% 📉

• The BoC is expected to continue easing as growth risks mount.
• Inflation is not a constraint, allowing the central bank to provide additional support.

2️⃣ Tariff Uncertainty Driving Policy Decisions 🌍

• Trade negotiations remain fluid, making economic projections uncertain.
• The BoC will likely respond to weakening sentiment rather than wait for clear tariff outcomes.

3️⃣ CAD Could Act as a Buffer 💵

• Policymakers may see currency depreciation as a stabilizer for trade disruptions.
• The 2y1y CAD-US terminal rate spread is still at extreme levels but expected to normalize.

4️⃣ BoC Decision to Have Limited Impact on USD/CAD 🔄

• FX markets are more focused on trade talks and the political outlook.
• Any USD/CAD reaction is expected to be muted without further clarity on tariffs.

Conclusion:

BofA expects the BoC to cut rates by 25bps but sees little impact on USD/CAD, as tariff negotiations and election uncertainty dominate the market narrative. With inflation in check, the BoC will continue to lean against downside economic risks, keeping further rate cuts on the table.

For bank trade ideas, check out eFX Plus. For a limited time, get a 7 day free trial, basic for $79 per month and premium at $109 per month. Get it here.

This article was written by Adam Button at www.forexlive.com.