USD/CAD Trade: Bracing for the BoC

Bank of Canada’s expected rate cut

It’s a fundamental day for the Canadian dollar given the Bank of Canada (BoC) will announce its policy decision, and market pricing (LSEG) fully expects it’ll be a fifth consecutive rate cut and not far off fully pricing in another larger 50bp (basis point) reduction to take it to 3.25%. And while it’s been notable cuts from the 5% peak in the current cycle, rate reductions in 2025 won’t be as large nor consecutive after the first quarter as market pricing sees it reaching and settling around 2.5%.

There have been more cuts out of the BoC compared to the US Federal Reserve, and that’s expected to be the case next year but by a much smaller margin compared to what we’ve seen (and are expecting from both of their last meetings) in 2024.

Canadian data as of late has been mixed where the figures that were worse than forecast included GDP (Gross Domestic Product) for September up only 0.1% m/m (month-on-month), CPI (Consumer Price Index) for October hotter than anticipated, and unemployment in November rising to 6.8% from 6.5%. It’s important to note that on the pricing front the October headline y/y (year-on-year) figure rose back up to 2%, but those expecting a larger 50bp cut are taking their cue from November’s unemployment rate increase.

And then there’s what’s to come with the incoming Trump administration and the proposed tariffs. Plenty of key central banks globally have been bracing for it by reducing rates/introducing easing even if they haven’t mentioned the cause, and the same is expected out of the BoC later today.

USD/CAD Technical analysis, overview, strategies, and levels

A brief look at the chart and the key technical indicators and it’s clear the run from the 1.34s to the 1.41s has turned nearly all of them bullish in both daily and weekly time frames. In both, price is above all its main moving averages and at the upper end of the Bollinger Band, a positive DMI (Directional Movement Index), an ADX (Average Directional Movement Index) in trending territory, and an RSI (Relative Strength Index) just shy of overbought territory.

The technical overview has kept buys in the conformist camp and sell-strategies reserved for contrarians, but keep in mind that for today it’s a fundamental event not far off fully priced in for one direction, and where key market participants are less likely to hold sizable liquidity at notable levels and pivot points. Those going opposite (for whatever reason) ideally doing so after a significant reversal once the news breaks when volatility is highest and by a less cautious reversal thereafter, while breakouts can tweak the levels below should they wish to get in on the action earlier or later.

IG client* and CoT** sentiment for USD/CAD

As for sentiment going into the event, it’s been a story of majority sell bias among IG clients with the latest moves taking them not too far off extreme short territory. CoT speculators according to the latest report is a story of firmly being net sell CAD (net long USD/CAD) with the latest print at 89% unchanged w/w (week-on-week) with an increase in CAD longs (by 415 lots) easily outdone by a far larger one for shorts (by 5,759).

USD/CAD Chart with retail and institutional sentiment

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.
**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.