The Bank of Canada kept its policy rate at 2.25% and removed guidance saying the current overnight rate is appropriate. The Bank’s statement referred to softer economic data since January. It said growth risks are tilted to the downside, while inflation risks are tilted to the upside. It also said it plans to look through higher near-term energy prices, but will not allow them to feed into persistent inflation.

Policy Risks Skew Toward Easing

TD Securities said near-term policy risks appear skewed towards easing. It added that a prolonged conflict in the Middle East could prompt a reassessment of the Bank’s stance. The report referred to the risk of stagflation and noted softer labour market momentum. It also stated that the Canadian dollar has lower sensitivity in risk-off moves versus non-USD peers, with support from oil links and terms of trade. TD Securities expects USD/CAD to move higher if the conflict persists. It cited rate and growth differences in favour of the US and an ongoing risk-off backdrop. Looking back at the Bank of Canada’s statement from 2025, we can see the foundation was laid for the policy divergence we are experiencing today. The bank’s removal of the phrase that its policy rate was “appropriate” signaled a dovish pivot that preceded the rate cuts later that year. This move correctly anticipated the economic slowdown that followed.

Implications For Rates And Fx Positioning

The stagflationary risks the BoC flagged then are now our primary concern. With the latest inflation data for February 2026 coming in at a sticky 2.9%, well above the bank’s target, further rate cuts seem unlikely in the short term. This is compounded by the most recent labour force survey showing job growth has stalled, with unemployment ticking up to 6.3%. For interest rate traders, this suggests the path of least resistance is a steeper yield curve. We should consider using options on BAX futures to position for the Bank of Canada being forced to hold its current 1.75% policy rate for longer than the market expects, even as growth stagnates. The front end of the curve appears anchored while the long end remains vulnerable to persistent inflation. The forecast for USDCAD to move higher in 2025 proved accurate, largely driven by the rate and growth differentials that still favour the U.S. today. With the Fed funds rate at 3.00% compared to the BoC’s 1.75%, the positive carry for holding US dollars remains significant. We should be using currency options to hedge against further Canadian dollar weakness or to position for a move toward 1.4000 in the coming months. The Middle East conflict mentioned last year did not escalate as feared, but it has contributed to a higher floor for oil prices, with WTI now consistently trading above $85 per barrel. This provides a modest tailwind for the loonie against non-USD peers, making short CAD positions against currencies like the Euro or Yen less attractive. This environment supports strategies using derivatives to bet on CAD outperformance on the crosses, even while it weakens against the dollar. Create your live VT Markets account and start trading now.

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