Deutsche Bank Comments on Canadian Dollar Ahead of This Week's Bank of Canada Policy Meeting

12:35 PM EST, 12/09/2025 (MT Newswires) -- The Bank of Canada meets on Wednesday, but the unanimous view is for no change in interest rates, said Deutsche Bank.

That follows neutral language from the BoC's last policy meeting, plus some strong data that's taken the economic surprise index to near a three-year high, and the highest in G10, wrote the bank in a note. Specifically, there's been a three-month string of surprisingly strong employment data, a big gross domestic product beat and ongoing stickiness in underlying inflation.

As a result, markets have flipped from pricing the probability of cuts to the probability of hikes -- 25bps priced by October 2025, stated Deutsche Bank. It's "unlikely" the BoC could tilt a little hawkishly this week. Unlikely.

A careful read of the data argues for caution, and the bank is more concerned about downside risks to growth/rates/Canadian dollar (CAD or loonie) than upside.

It would simply be very unusual to see the BoC hiking rates even if others in G10 proceed while the Federal Reserve is still in cutting mode, according to Deutsche Bank. The BoC policy rate has around a 90% correlation to Fed funds, in both level and change terms -- that dwarfs the correlations that others have.

That's hardly surprising given the leverage of Canada's economy to the United States. A hawkish argument would be that the BoC rate has not been this far below Fed funds since the 1990s, so it could converge. But the growth picture certainly doesn't suggest that Canada's low rates are helping its economy outperform yet, added the bank.

Deutsche Bank sees risks skewed to dovish, not hawkish, repricing for the BoC. But it's unlikely to be significant until the data shifts from its current trajectory. USD/CAD looks 1% to 2% too high compared with relative rates right now.

However, a bit of risk premium makes sense to the bank -- Canada's export growth has been the worst in the world and trade talks have stalled, and Canada is offering very low carry while being heavily reliant on debt inflows.

In sum, Deutsche Bank keeps a bearish bias, but needs the data to weaken for it to really play out.

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