The Canadian Dollar (CAD) was among the best-performing G10 currencies over the past two weeks, during the Iran conflict, alongside steady inbound flows. Signs of improvement appeared towards end-February, possibly linked to rebalancing, and interest has stayed consistent.
Its year-to-date flow average is +0.07, which provides a buffer, but positioning appears cautious ahead of the Bank of Canada (BoC) decision. USD/CAD selling is outpacing direct CAD buying, which points to hedging activity rather than broad demand for CAD.
The CAD aggregate inflow average is +0.07, compared with 0.18 for CAD versus USD, and it would take heavy CAD selling on cross rates to close that gap. Against higher-yielding G10 and emerging market currencies, CAD activity is described as carry-focused, supported by its liquidity and ease of management.
The Bank of Japan (BoJ) and BoC are being watched for foreign exchange reactions and the tone of forward guidance. The source notes the article used an AI tool and was edited.
We remember seeing strong inflows into the Canadian dollar during the geopolitical tensions in early 2025. The currency performed well, but even then, its status as a true safe haven was questionable. Now, in March 2026, the landscape has shifted from geopolitical risk to central bank policy divergence.
The focus is squarely on the Bank of Canada, which is facing a different set of problems than last year. With fourth-quarter 2025 GDP coming in flat and the latest January data showing a 0.1% economic contraction, pressure is mounting for the BoC to consider rate cuts. While the latest CPI reading of 2.9% is still a bit high, the weakening economy is becoming the dominant narrative for the market.
This contrasts with the situation in the United States, where the Federal Reserve appears to be on a slower path to easing policy. This divergence suggests a potential headwind for the Canadian dollar that did not exist this time last year. For derivative traders, this setup points towards strategies that would benefit from a rising USD/CAD exchange rate.
The energy angle, which offered some support last year, is still present with WTI crude oil holding steady around $82 per barrel. However, this is unlikely to offset the negative sentiment from a potentially dovish central bank. We are not seeing significant interest in the CAD on a relative value basis compared to other currencies, much like the dynamic observed in 2025.
Given the market is pricing in a higher probability of the BoC cutting rates before the Fed, traders should consider positioning for Canadian dollar weakness. Buying USD/CAD call options with expirations after the next BoC meeting could be a straightforward way to play this potential move. This strategy offers defined risk while capturing potential upside if the BoC signals a clear path to lower interest rates.
Alternatively, for those expecting a significant move but uncertain of the direction, an options straddle on USD/CAD could be appropriate. This would profit from a spike in volatility following the central bank’s announcement. The key is to prepare for policy divergence to drive the currency pair in the coming weeks.
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