Synopsis:

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.