This week, our currency strategists focused on the BOC Monetary Policy Statement for potential high-quality setups.
Out of the four scenario/price outlook discussions this week, one discussion arguably saw both fundie & technical arguments triggered to become a potential candidate for a trade & risk management overlay.
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
If you’d like to follow our “Watchlist” picks right when they are published throughout the week, you can subscribe to BabyPips Premium.
Check out our review of that discussion to see what happened!
CAD/JPY: Tuesday – June 3, 2025
On Tuesday, our strategists had their sights set on the BOC monetary policy statement and its potential impact on the Canadian dollar.
Based on our Event Guide, expectations were for the BOC to keep interest rates steady at 2.75%, with members repeating their plans to “proceed carefully” but “act decisively” if needed amid ongoing trade uncertainty.
With those expectations in mind, here’s what we were thinking:
The “Loonie Lift” Scenario:
If the BOC maintained a more hawkish stance or expressed confidence about the economic outlook despite trade headwinds, we anticipated this could boost CAD. We focused on CAD/CHF for potential long strategies if risk sentiment was net positive, especially given the SNB’s recent dovish stance and Switzerland’s deflation concerns.
In a risk-off environment, AUD/CAD shorts looked promising given Australia’s recent dovish RBA meeting minutes and weaker domestic data.
The “Loonie Lag” Scenario:
If the BOC signaled increased concerns about trade impacts or hinted at potential rate cuts, we thought this could weigh on CAD. We considered CAD/JPY for potential short strategies in a risk-off environment, particularly given the pair’s position near key resistance levels and the BOJ’s recent dovish commentary about trade uncertainties.
If risk sentiment stayed positive, GBP/CAD long made sense given the Bank of England’s more cautious approach to rate cuts.
What Actually Happened
The BOC kept rates steady at 2.75% as expected, but the statement revealed a central bank grappling with significant uncertainties.
Key points from the decision:
- Trade uncertainty remains elevated: Despite some moderation in US-China tensions, tariff rates remain well above early 2025 levels, with ongoing threats of new trade actions
- Mixed economic signals: Canada’s Q1 GDP growth of 2.2% slightly exceeded forecasts, but was driven by temporary factors including export pull-forward and inventory accumulation
- Labor market weakening: Unemployment rose to 6.9% in April, with job losses concentrated in trade-intensive sectors
- Inflation pressures mixed: Headline CPI fell to 1.7% in April due to carbon tax elimination, but core measures firmed to 2.3%, slightly above Bank expectations
Governor Macklem’s press conference revealed a governing council less unified than in previous meetings, noting “more diversity of views” regarding future policy direction while emphasizing a data-dependent approach.
Market Reaction
This outcome fundamentally triggered our CAD bearish scenarios, as the BOC’s cautious tone and acknowledgment of internal policy debates suggested a central bank moving closer to easing rather than tightening. With risk sentiment leaning neutral to slightly negative around the event, CAD/JPY became our focus.
Looking at the CAD/JPY chart, we saw an immediate bearish reaction after the BOC statement, with the pair dropping from around the 105.25 level as the central bank’s dovish undertones weighed on the Loonie. The pair found initial support near the pivot point (104.646) but struggled to regain momentum through the remainder of the North American session.
The bearish CAD narrative also quickly shifted as broader market dynamics took over. Despite the BOC’s cautious stance, rising oil prices throughout the week provided underlying support for the commodity-linked Canadian dollar. More importantly, persistent JPY weakness driven by the Bank of Japan’s dovish outlook on trade uncertainties began to dominate the pair’s direction.
By Friday’s close, CAD/JPY had reversed its initial post-BOC losses and climbed toward the R1 resistance level (105.775), supported by a 6.5% weekly gain in crude oil prices and broad-based yen selling that made the currency the worst performer among major currencies for the week.
The Verdict
So, how did it all play out?
Our fundamental analysis correctly anticipated potential CAD weakness on the BOC’s cautious stance, which initially played out as expected. However, the strategy discussion was “not likely” supportive of a net positive outcome due to several factors that became apparent throughout the week.
While traders who entered short positions immediately after the BOC statement could have captured some initial downside movement, the execution window was extremely narrow. The neutral-to-mixed risk environment and relatively dovish (but expected) BOC outcome provided low conviction for sustained CAD weakness.
More critically, broader market forces quickly overwhelmed the CAD-specific fundamentals. The combination of rising oil prices supporting the commodity-linked Loonie and persistent JPY weakness driven by BOJ dovishness created a perfect storm for CAD/JPY upside that lasted through the week’s end.
If traders followed the short strategy but failed to exit quickly after the initial move, they likely faced mounting losses as the pair climbed back above the event price and continued higher.
The key lesson here is that while our fundamental analysis was directionally correct initially, the low-conviction setup and conflicting cross-currents made this a challenging trade to execute profitably over anything beyond the immediate post-event reaction.
