Intraday opportunity: Look for CADJPY buyers if the BoC cuts by only 25bps

The Bank of Canada’s interest rate decision today presents a crucial moment for the Canadian dollar, with a consensus split between a 25 basis point (bps) and 50bps cut. Markets are largely expecting a 50bps cut, which would take the rate down to 3.75%, as surveyed by 19 of 29 analysts. However, there is still a chance of a smaller 25bps cut, supported by recent strong labor data and the softer inflation readings. This scenario creates an interesting trading setup, particularly for CAD/JPY, where the magnitude of the rate cut could create significant volatility. Let’s explore this further.

The current pricing of a 50bps cut reflects the broad expectation that the BoC will accelerate its monetary easing with inflation dropping lower. Recent CPI readings came in softer than anticipated, with headline inflation at 1.6% (below the forecasted 1.8%) and core inflation stabilizing near target levels. This softness, paired with the BoC Business Outlook Survey showing wage and price growth expected to soften, supports the larger cut. However, stronger-than-expected labor data, including the addition of 47,000 jobs and a slight dip in unemployment, provide a case for a smaller 25bps reduction.

If the BoC opts for the smaller 25bps cut, the Canadian dollar could see a strong rally, especially against the yen, where CAD/JPY could present a solid buying opportunity. The pair has found support around the 76.80 level and a more cautious BoC move would likely trigger a bounce from these levels. Conversely, a 50bps cut in line with expectations would likely weigh on the Canadian dollar, widening the rate differential with the Fed and potentially driving CAD weakness.

The Bank of Canada’s forward guidance in the accompanying statement will also be critical. Should Governor Macklem signal the potential for continued aggressive easing, including further cuts in December, it could put additional pressure on the Canadian dollar. However, any signs that the BoC might slow the pace of cuts could provide further support for the CAD.

In summary, today’s BoC decision offers two key scenarios: a 25bps cut would likely strengthen CAD/JPY, offering a buying opportunity around support at 76.80. A 50bps cut, combined with dovish forward guidance, could open the door for CAD weakness. As always, the post-decision press conference and any hints from Governor Macklem will be crucial to monitor.