Synopsis:

BofA expects the Bank of Canada to cut rates by 25bps to 2.50% at its April 16 meeting, citing a weakening economic backdrop and labor market softness. Despite sticky inflation, they see the BoC leaning toward preemptive easing. A surprise rate cut could prompt a sharp move higher in USD/CAD.

Key Points:

• Base Case:
  BofA forecasts a 25bp BoC cut to 2.50%, though acknowledges the decision is finely balanced.

• Rationale for a Cut:

  • Economic indicators for February and March show notable slowing, largely due to tariff-related uncertainty.

  • The BoC may act to preempt further deceleration in growth and employment.

• Counterarguments:

  • Both headline and core inflation remain above 2.5% y/y.

  • Tariffs could lead to higher inflation prints, complicating easing.

• Market Positioning:

  • Only 28% of a rate cut is priced in, with a full cut not seen until September.

  • If the BoC cuts, it would surprise markets, creating upside risk for USD/CAD.

• FX Implications:

  • A rate cut could spark a knee-jerk rally in USD/CAD above 1.40.

  • Even if the BoC holds, short-term risk skew is to the upside, before a longer-term USD/CAD downtrend resumes.

Conclusion:

With a rate cut only partially priced in, a dovish BoC surprise could fuel a short-term spike in USD/CAD. BofA remains bearish on the pair over the year, but in the immediate term, sees 1.40+ as a likely reaction level regardless of the BoC's decision.