CAD Under Pressure: What Bank of Canada Might Do Today

The Bank of Canada’s interest rate decision today is widely anticipated to result in a 25-basis-point cut, with about 80% of market participants pricing in this outcome. This expectation is based on a combination of rising unemployment and a slowdown in inflation, which has put pressure on the Canadian economy. A 25-basis-point reduction seems like the logical course of action given the current data, but it’s important to note the potential for unexpected developments.

The real focus for traders, however, is the possibility of a larger move—a 50-basis-point cut. Though only 20% of market pricing anticipates this, it remains a distinct possibility. If the BoC were to opt for this more aggressive cut, it would signal deeper concerns about the state of the Canadian economy, and we could expect significant market reactions. Specifically, the Canadian dollar (CAD) could experience sharp selling, as traders adjust to the reality of a more dovish central bank. This could drive strong movement in the Dollar-CAD pair, with traders potentially seeing 30-40 pip moves or more, depending on market momentum.

In this scenario, leveraging positions could yield substantial gains, especially for those who are ready to act quickly. However, if the Bank of Canada sticks to the expected 25 bps cut, the market reaction could be more muted, although some CAD weakness may still occur due to the prolonged economic challenges facing the country. 

Traders should be prepared for potential volatility around 2:45 PM UK time when the rate decision is announced. A surprise 50 bps cut would likely lead to CAD weakness, but even the anticipated move could offer opportunities, particularly if the Bank signals further rate cuts down the line in the press conference. As always, the key will be managing risk and positioning ahead of the announcement, with a close watch on how the market digests the BoC’s monetary policy direction.