The Canadian dollar has stayed relatively stable against the US dollar since the Middle East conflict started. Markets expect the Bank of Canada to leave interest rates unchanged, while adopting a more hawkish stance.

The Bank of Canada is set to release its Monetary Policy Report alongside the decision. The report is expected to revise GDP growth lower for this year and revise inflation higher.

Energy prices are expected to fall back in a de-escalation scenario, but remain above pre-conflict levels due to ongoing geopolitical risk pricing. This would leave inflation higher than pre-conflict assumptions and harder to ignore.

The Strait of Hormuz remains closed, while risk assets have stayed resilient. In this context, the Bank of Canada is expected to be more hawkish than in March and place greater weight on upside inflation risks.

Short-term market positioning leans towards the US dollar on the risk of renewed conflict and higher crude oil prices. The latest IMM data showed the largest weekly Canadian dollar selling by Leveraged Funds since July 2024.

In a renewed escalation, the Canadian dollar may lag the US dollar, but moves are expected to be more modest than in other energy-importing G10 currencies. The article was produced using an AI tool and reviewed by an editor.

With the Bank of Canada meeting approaching, we are not expecting a change in interest rates but are preparing for a more hawkish tone. Canada’s latest CPI print for March 2026 came in hotter than expected at 3.1%, putting upward pressure on the central bank to address inflation. This backdrop makes it unlikely the BoC will signal any rate cuts in the near future.

The primary driver for inflation remains elevated energy prices, stemming from the ongoing Middle East conflict. With WTI crude prices holding firm above $95 a barrel, the market is pricing in a persistent geopolitical risk premium that the Bank of Canada can no longer ignore. Even if tensions ease, we believe oil will settle at a higher base level than before the conflict began.

In the immediate weeks, a bias toward the US dollar seems prudent, especially if the conflict re-escalates. The latest positioning data shows leveraged funds increasing their short positions on the Canadian dollar, a move reminiscent of the large CAD selling we saw back in July 2024. Therefore, traders could consider using futures or options to position for a move higher in the USD/CAD pair.

However, selling the Canadian dollar outright is a risky strategy, as it is likely to outperform other G10 currencies in a high oil price environment. Given that countries like Japan and Germany import over 90% of their energy needs, their currencies remain far more vulnerable to an oil shock than the CAD. This suggests looking at derivatives that favour CAD against the Euro or the Yen could be a sound relative value trade.

The uncertainty surrounding the geopolitical situation means volatility will likely increase. We only have to look back to the initial conflict escalation in late 2025 to see how currency volatility spiked sharply. This suggests that buying options, like straddles on USD/CAD, could be a prudent way to position for a significant price move in either direction without betting on the outcome of the conflict itself.