The Global Strategy Team at TD Securities reports that the Bank of Canada left rates unchanged at 2.25% and maintained a balanced tone. They expect the Bank to hold policy through 2026, with the next hike projected for early 2027. In foreign exchange, they see USD/CAD converging toward 1.38 in the near term as markets retain some tightening premium.

BoC hold supports modestly stronger USD/CAD

"The Bank of Canada held rates at 2.25% as widely expected, as the statement struck another balanced tone. Most details were unchanged from April's meeting, as the Bank notes both downside and upside risks being heightened as the war in Iran continues."

"The Bank does not want to commit to a set interest rate path amidst the geopolitical uncertainty. We continue to see the Bank holding for the rest of 2026 as the shelter component keeps inflation contained and growth stabilizes. We still expect the next move from the Bank will be a hike in 2027Q1."

"The BoC kept its options open, allowing markets to retain some tightening premium if data remain firm. With the broader CAD backdrop looking less one-sided, USD/CAD should converge to 1.38 in the near term."

"Front-end rates are fair to just modestly cheap here, and we see no reason for the Bank to change its tact at upcoming meetings. For now, we are going to lean into post-extension flattening technicals."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)