Bank of Canada is set to cut rates by 25bp today. Markets have converged to this view, and the CAD OIS curve now prices in 21bp, as ongoing trade-related risks to activity and jobs – even higher after last week’s US-Canada escalation – are outweighing some stronger-than-expected employment and inflation figures for September, ING's FX analyst Francesco Pesole notes.

Downside risks for CAD today

"Markets are largely pricing in a cut, but it will be hard for the BoC to shut the door to more easing given the worsening trade picture. There are some expectations in the CAD curve for more cuts, but rather diluted over the next 6 months and for 15bp in total."

"The real policy rate in Canada is well above the last time unemployment was at the current 7.1%, and the extraordinary downside risks to the economy probably justify at least one more cut. That might come earlier than expected, with January potentially becoming a target for easing speculation: currently, it's embedding 35bp of easing in total."

"The loonie has been resilient to negative trade news, partly as it was already trading at a discount relative to short-term fair value. Any dovish repricing in the CAD curve shifts that CAD fair value lower (higher in USD/CAD), and can allow further build-up of CAD shorts, even if that is a rather crowded trade. As we see USD resilience as temporary, we still expect USD/CAD to end the year at 1.38. In the near term, the balance of risks is tilted to 1.41 in our view."