Canadian Labour Market Shock
Recent Canadian labour data were weak, with jobs down 84k in February and full-time employment down 108k. MUFG noted this was the largest fall since the April 2020 drop after the start of Covid. MUFG projects a de-escalation within the next two weeks and still allows for a BoC cut by year-end. It expects the central bank to avoid firm policy direction until the scale of any energy price shock is clearer. If the conflict lasts longer and crude rises further beyond USD 100, USD/CAD may still trade in range at first. MUFG said Canada’s terms-of-trade support could fade if North American growth risks increase and equity markets fall. Back in early 2025, we noted the Canadian dollar’s resilience due to high oil prices stemming from geopolitical conflict. At the time, we expected the Bank of Canada to remain cautious and hold rates, keeping USD/CAD in a narrow band. The main risk we saw was an escalation that could harm North American growth.Market Repricing And Options Positioning
That view held for a while, but the anticipated rate cuts by year-end 2025 did not happen. The BoC instead held its policy rate firm at 4.5% as the energy price shock kept inflation stickier than expected through the second half of the year. This decision provided a floor for the Canadian dollar, preventing a significant slide. The situation now has shifted from what we saw after that terrible jobs report in February 2025, which posted a loss of over 84,000 positions. Canada’s latest employment data for February 2026 showed a healthy gain of 41,000 jobs, and headline inflation has cooled to 2.8%. The market is now pricing in a greater than 60% chance of a BoC rate cut by July. For derivative traders, this signals an opportunity to position for a policy divergence, as the Federal Reserve is expected to hold its rates steady for longer. Buying USD/CAD call options is a direct way to position for upcoming Canadian dollar weakness driven by potential BoC rate cuts. Implied volatility will likely increase heading into the BoC’s April meeting, making entry now more attractive. Traders could look at call options with strike prices around 1.3700 to 1.3850 for the summer months. The primary risk to this outlook remains the price of oil, which has been stable in the mid-$80s per barrel. A sudden spike in crude prices could force the BoC to delay its easing cycle and would cap gains for USD/CAD. Create your live VT Markets account and start trading now.
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