TD Securities expects the Bank of Canada to weigh trade uncertainty, higher oil prices and domestic demand. It says GDP needs to run above potential to avoid disinflation risks and possible rate cuts, with Q1 data a key test. The Bank of Canada’s January Monetary Policy Report forecast 1.8% growth, while TD Securities flags that growth materially below 1.0% would raise doubts about the current stance. It adds that policy may not respond to structural weakness, but could react to cyclical shocks.

Oil Prices And Growth Outlook

The January 2026 MPR assumed $55/bbl WTI, while current levels are around $75–$80 for WTI/Brent. If those prices hold, TD Securities estimates they could add 0.4–0.5 percentage points to growth and lift the inflation profile by a similar amount, with headline CPI near 2.5% by Q4. It expects higher energy prices to support a hold decision in a close call, but notes consumer conditions and government spending may matter more for the outlook. It also says the Bank may look through any headline inflation rise if it does not feed into core measures. We see the Bank of Canada in a delicate balancing act, waiting for key economic data before making its next move. The primary focus is on Q1 growth, where a figure significantly below 1.0% would amplify calls for a rate cut. This creates a data-dependent environment for the Canadian dollar and short-term interest rates. Elevated energy prices are currently providing a strong tailwind against rate cut expectations. With WTI crude holding steady near $78 a barrel following the OPEC+ decision last month to extend production cuts, prices are well above the Bank’s January forecast of $55. This price strength directly supports our economic growth and inflation profiles, making it harder for the Bank to justify easing policy.

Rates Volatility And Trading Positioning

This situation suggests positioning for increased volatility in Canadian interest rate markets over the next several weeks. Trading strategies using options on Bankers’ Acceptance futures could be beneficial, as they can profit from a significant market move in either direction. The upcoming release of monthly GDP and employment figures for February will be the next major catalysts. We must remember that the boost from energy could be secondary to the health of the Canadian consumer. Looking back at the sluggish retail sales data from the final quarter of 2025, it’s clear that household spending remains a significant point of vulnerability. Any signs that this weakness is carrying over into the new year could easily outweigh the positive impact of oil prices. Consequently, the Canadian dollar is facing a pivotal period against the US dollar. We anticipate the currency will be highly sensitive to upcoming inflation reports, specifically the core CPI measures. A failure of core inflation to rise alongside the energy-driven headline number would signal to us that the Bank of Canada can ignore the oil price shock and lean towards a more dovish stance. Create your live VT Markets account and start trading now.

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