Synopsis:

BofA expects the Bank of Canada (BoC) to deliver a 25bp rate cut this week, consistent with consensus and market pricing. Despite improving labor market data, negative domestic sentiment indicators suggest further rate cuts are likely. Tariff-related risks and forward guidance will heavily influence USD/CAD.

Key Points:

1. BoC Rate Cut Expected:

   • A 25bp rate cut is anticipated, with potential for 1-2 additional cuts to address negative domestic sentiment.
   • BoC's current policy rate remains within the 2.25-3.25% neutral range, leaving room for further easing.

2. Domestic Sentiment Weakness:

   • Despite strong employment data, recent BoC Business and Consumer Surveys indicate persistent negative sentiment, warranting continued monetary easing.

3. Impact on CAD:

   • With a rate cut fully priced in, USD/CAD will likely remain under pressure due to continued US tariff risks on Canadian imports.
   • Elevated options demand for USDCAD calls reflects bearish sentiment on CAD amid uncertainty.

4. USD/CAD Outlook:

   • USD/CAD is expected to break above the year-to-date resistance of 1.45 if the 25% tariff on Canadian imports is confirmed.
   • A move above 1.50 could materialize if the BoC signals a willingness to cut rates further toward the lower end of the neutral range in response to tariffs.

Conclusion:

The January BoC meeting will likely validate market expectations for a 25bp cut, with forward guidance shaping USD/CAD direction. Persistent tariff risks and potential dovish signals from the BoC could drive the pair above key resistance levels, keeping CAD vulnerable.