Canada’s Ivey Purchasing Managers Index (seasonally adjusted) fell to 49.7 in March. This was below the forecast of 55.9.

A reading below 50 indicates contraction in activity, while a reading above 50 indicates expansion. March’s result moved the index into contraction territory.

The March Ivey PMI report has delivered a surprise, dropping to 49.7 against an expected 55.9 and falling into contraction territory for the first time in several months. This signals a potential and unexpected stall in the Canadian economy. We must now adjust our strategies for increased downside risk and volatility in Canadian assets over the next few weeks.

This weak economic data directly challenges the Bank of Canada’s recent hawkish tone, which was concerned with services inflation that was running at 3.2% year-over-year in January 2026. Consequently, we see a higher probability of the central bank pausing, or even signaling future rate cuts, which should put downward pressure on the Canadian dollar. We are considering call options on the USD/CAD pair to capitalize on this expected currency weakness.

The outlook for Canadian equities has also soured with this report. A contracting purchasing manager’s index suggests a future decline in corporate earnings and economic activity. From our vantage point in 2025, we recall how a similar PMI slump in mid-2024 preceded a 5% pullback in the S&P/TSX Composite Index, suggesting we should look at buying put options on broad market ETFs.

Given the shift in monetary policy expectations, we anticipate that yields on Canadian government bonds will fall. The market has quickly repriced the odds of a summer rate hike, with derivatives markets now indicating less than a 15% chance, down from over 50% last week. This makes going long on Canadian bond futures an attractive position, as their value will increase if interest rates decline.

The wide miss between the forecast and the actual PMI figure is likely to spike implied volatility across Canadian markets. This presents an opportunity for option sellers who can collect richer premiums, but it also makes buying protective puts more expensive. We will be watching the VIXC, Canada’s volatility index, for signs of sustained fear before adding significant new short positions.

GBP/JPY rose for a second day on Tuesday, trading near 211.60 and close to one-week highs. The move came as higher oil prices linked to the US-Iran conflict weakened the Japanese Yen against major currencies.

Markets remained cautious ahead of a deadline set for 8:00 p.m. Eastern Time (00:00 GMT on Wednesday) for Iran to “make a deal or open up the Strait of Hormuz”. US President Donald Trump said the US could target Iran’s energy and civilian infrastructure if no agreement is reached.

Oil Shock Weighs On The Yen

Japan, a major net energy importer, faces higher import costs from rising oil prices, which can widen trade deficits and pressure the currency. Finance Minister Satsuki Katayama said officials are monitoring scenarios for oil stockpiles in light of the Middle East situation.

Rate expectations also supported GBP/JPY, with policy differences between the Bank of England and the Bank of Japan. Markets are pricing in up to two UK rate hikes by year-end, while Japan’s policy normalisation may be restrained by weaker growth from energy costs.

UK data showed the S&P Global Services PMI fell to 50.5 in March from 53.9, below the flash 51.2 and the lowest since April 2025. The Composite PMI dropped to 50.3 from 53.7, while Japan’s February earnings and current account data are due on Wednesday.

Given the ongoing US-Iran conflict, we see continued upward pressure on the GBP/JPY pair as oil prices hold above $115 a barrel. This geopolitical tension disproportionately weakens the Japanese Yen due to Japan’s heavy reliance on foreign energy. As a result, we should position for further yen weakness in the coming weeks.

Carry Trade Still Dominates

The primary driver remains the stark interest rate differential between the Bank of England and the Bank of Japan, which currently sits over 5 percentage points. This gap makes holding the Pound more attractive than the Yen, fueling a profitable carry trade. We saw this theme play out through much of 2025, and the current energy crisis is only accelerating it.

Japan’s vulnerability is clear, as recent government data shows it still imports around 96% of its primary energy supply. Last month’s trade data already showed a widening deficit directly linked to higher energy import costs. This fundamental economic strain is likely to persist as long as tensions in the Strait of Hormuz remain unresolved.

While the Pound is the stronger leg of this pair, we must not ignore its own weaknesses. The recent slip in the UK Services PMI to 50.5, its lowest point since the brief recession scare in April 2025, suggests the UK economy is not immune to global pressures. However, with UK core inflation remaining stubbornly above 3.5%, the Bank of England is forced to maintain high rates.

The biggest immediate risk to a long GBP/JPY position is intervention from Japanese authorities. With USD/JPY approaching the 160.00 level, a line that has historically triggered direct market action, traders should be cautious about becoming overly leveraged. We saw how quickly officials acted back in 2022 and 2024 to defend the currency, and their resolve should not be underestimated.

Considering the risk of a sharp reversal from either a peace deal or intervention, buying call options on GBP/JPY could be a prudent strategy. This allows us to capture further upside while defining our maximum risk to the premium paid. Using options with a two-to-three-week expiry would cover the period immediately following the 8:00 p.m. deadline for Iran.

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GBP/JPY edged up on Tuesday, with the Yen under pressure as higher oil prices linked to the US-Iran war raised concerns about Japan’s economy. GBP/JPY traded near 211.60, close to one-week highs.

Markets were cautious ahead of a deadline set by US President Donald Trump for 8:00 p.m. Eastern Time (00:00 GMT on Wednesday). Trump said Iran should “make a deal or open up the Strait of Hormuz”, and warned of strikes on Iran’s energy and civilian infrastructure.

Oil Shock Risks For The Yen

Japan’s status as a net energy importer makes it sensitive to rising oil prices, which can lift the import bill and widen trade deficits. Finance Minister Satsuki Katayama said officials are assessing scenarios for the economy and oil stockpiles, taking account of the Middle East situation.

Higher inflation expectations could keep the Bank of Japan on a gradual tightening path, but energy costs may restrain growth and slow policy normalisation. The UK is also a net energy importer, but with lower exposure than Japan.

With UK growth described as fragile and inflation above the Bank of England target, rates are expected to stay higher for longer, with markets pricing up to two rate rises by year-end. Further GBP/JPY gains may be capped by intervention risk, with USD/JPY near 160.

UK S&P Global Services PMI fell to 50.5 in March from 53.9 in February, below the flash 51.2 and the lowest since April 2025. Composite PMI dropped to 50.3 from 53.7. Japan data due Wednesday include February Labour Cash Earnings and the Current Account (n.s.a.) balance.

The immediate focus for us is the immense event risk surrounding the US-Iran deadline tonight. This geopolitical tension is driving volatility, so we should use options to manage our exposure. Buying call options on GBP/JPY allows participation in a potential upside breakout from an oil shock while strictly defining our maximum loss.

Structuring The Trade With Options

The core of this trade hinges on the yen’s vulnerability to soaring energy prices, which heavily impacts Japan’s trade balance. We saw in 2022 how the invasion of Ukraine sent WTI crude prices jumping over 60% in a matter of months, and a direct conflict in the Strait of Hormuz could be far more severe. This dynamic fundamentally weakens the yen against currencies of nations with less severe energy import dependency.

However, we must be extremely vigilant about intervention risk from Japanese authorities. We remember the Ministry of Finance stepping in forcefully multiple times back in 2024 when the dollar-yen rate pushed past the 160 level. Any rapid, speculative gains in GBP/JPY could trigger a similar defensive action to support the yen, making it a dangerous pair to short outright.

On the pound’s side, the picture is complicated by signs of a slowing domestic economy. The recent March Services PMI data, which fell to 50.5, marked the lowest reading since April of last year, pointing towards stagnation. Despite this, with UK inflation still running above target, the Bank of England is widely expected to maintain higher interest rates.

Therefore, a prudent strategy for the coming weeks could involve establishing a bullish stance through debit call spreads on GBP/JPY. This approach allows us to profit from a rise in the pair driven by interest rate differentials and energy dynamics. By selling a higher-strike call against a purchased call, we can reduce our initial cost and cap our potential gains below levels that might provoke an official response from Japan.

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Nordea analysts Jan von Gerich, Tuuli Koivu and Anders Svendsen expect the European Central Bank to focus on inflation rather than growth if the Middle East conflict continues and price pressures rise.

They forecast four rate rises of 25 basis points starting in June. This would take the ECB deposit rate to 3% by October.

Deposit Rate Outlook Through 2027

They expect the deposit rate to stay at 3% until the end of 2027. They also state that the risk is for earlier or larger moves.

They outline an alternative path in which the ECB starts raising rates in April. They also consider a first move of more than 25 basis points in June, while keeping 25 basis points as the most likely starting step.

They link the timing of the first rise to the conflict and energy prices. They link the number and pace of later rises to broader inflation pressures and economic performance, amid higher energy prices, uncertainty, and rising rates.

Looking back at the analysis from 2025, we expected the European Central Bank to begin an aggressive hiking cycle to control inflation. The ECB was indeed forced to prioritize inflation, raising the deposit rate even faster than anticipated to 3.5% by the end of last year. Those rate hikes, which were larger than the four 25bp moves we initially forecast, have successfully cooled demand.

Market Pricing Versus ECB Reality

We are now facing flat GDP growth across the Eurozone for the first quarter of 2026, with recent PMI data from Germany showing a contraction below 48.5. Despite this slowdown, core inflation remains stubbornly high at 3.6%, well above the ECB’s 2% target. This creates a difficult situation where the central bank is hesitant to signal any rate cuts that could refuel inflation.

The futures market is currently pricing in at least two rate cuts by the end of this year, but we see this as overly optimistic given the inflation data. Traders should therefore consider positioning for yields to remain higher for longer, perhaps by using options to bet against a sharp fall in the 2-year German bond yield. Given this uncertainty, implied volatility on EURIBOR options has climbed to levels not seen since late 2025, suggesting strategies that profit from price swings could be effective.

In the swaps market, this divergence between market expectations and central bank rhetoric presents an opportunity. Receiving the fixed rate on 2-year or 3-year swaps could be a profitable trade if the ECB holds rates steady through 2026, defying the market’s dovish bets. This position essentially bets that the current economic weakness will not be enough to force the ECB’s hand in the face of persistent inflation.

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Nordea analysts expect the European Central Bank (ECB) to focus more on inflation than growth as the Middle East conflict continues and price pressures increase. They forecast four 25 basis point rate rises starting in June.

In this forecast, the ECB would raise rates by 25bp at the June meeting and then deliver three more 25bp rises at consecutive meetings. This would take the deposit rate to 3% by October.

Inflation Risks Drive Policy Focus

They expect the deposit rate to stay at 3% through to the end of 2027. They also see a risk of an earlier start or larger moves than in their baseline forecast.

The first rise could come as early as April, or the June rise could be more than 25bp, depending on the price outlook. They link the timing of the first move mainly to the conflict and energy prices, and later decisions to wider inflation pressures and how the economy performs.

With new geopolitical risks pushing energy prices up, we expect the European Central Bank to again prioritize inflation over growth concerns. The recent jump in Brent crude to over $105 a barrel is feeding into broader price pressures, challenging the ECB’s current policy stance. This makes future interest rate hikes a distinct possibility this year, even after the long pause.

Eurostat’s latest flash estimate showed headline inflation for March ticking up to 3.1%, uncomfortably above the 2% target and a reversal of the disinflationary trend seen through 2025. We now forecast a 25 basis point hike at the June meeting, which would be the first change in policy in over a year. This initial step would signal a firm commitment to tackling this new inflationary wave.

Market Pricing And Rate Path Implications

For derivative traders, this means pricing in a more aggressive rate path, with short-term interest rate swaps (SIRS) likely to see upward pressure. We project a series of four 25bp hikes this year, bringing the deposit facility rate to 4.5% by October. Options markets should prepare for higher volatility, especially around ECB meeting dates in June, July, and September.

We then expect rates to remain at that level for the remainder of the forecast horizon until the end of 2027, as the bank ensures inflation is firmly anchored. Looking back at the rapid hiking cycle of 2022 and 2023, we know the central bank can act decisively when inflation expectations are at risk. While a 25bp move in June is our base case, an unexpectedly high inflation print for April could force the ECB’s hand for a larger 50bp hike.

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Sweden’s March flash inflation came in below forecasts. CPIF eased to 1.6% year on year versus a 2.2% market estimate.

CPIF excluding energy fell by 0.3 percentage points to 1.1% year on year, compared with a 1.5% market estimate. The main downward drivers were weaker prices for Food and for Recreation, Sport & Culture.

Inflation Surprise And Key Drivers

Petrol prices pushed in the opposite direction and lifted the headline CPIF measure. Recent signals from the Riksbank had pointed towards a more hawkish stance.

If the weaker inflation readings do not reverse soon, policy may stay unchanged for longer than previously indicated. The article notes it was produced using an AI tool and reviewed by an editor.

We remember how the surprise drop in Swedish inflation back in March 2025 caught the market off guard, with CPIF falling to 1.6% when 2.2% was expected. That unexpected weakness in food and recreation prices was enough to make the hawkish Riksbank second-guess its plans. This created a valuable precedent for how sensitive the central bank is to downside inflation surprises.

Now, on April 7, 2026, we see a similar story unfolding, but with even more conviction. The latest data for March 2026 showed headline CPIF at just 1.4%, far below the consensus forecast of 2.0%. This isn’t an isolated event; it’s backed by the latest statistics from the National Institute of Economic Research showing that Swedish consumer confidence fell to a six-month low in March.

Market Implications For Rates And Sek

This situation signals that the Riksbank’s hands are tied, making any rate hikes highly improbable for the remainder of the year. Derivative traders should consider positioning for a prolonged period of low rates, potentially by receiving fixed on Swedish interest rate swaps. The market is currently pricing in a less than 10% chance of a rate hike in 2026, a number we expect to fall further.

Consequently, this dovish monetary policy outlook will almost certainly weigh on the Swedish Krona. The SEK has already weakened by over 2% against the Euro since the inflation data was released. We believe entering new positions that bet on a weaker Krona, such as buying EUR/SEK call options or selling SEK in the forward market, is a prudent strategy for the coming weeks.

Looking back at the sharp SEK sell-off in the second half of 2024, when the Riksbank signaled a pause far earlier than the ECB, provides a clear historical parallel. That period showed how quickly the currency can depreciate when monetary policy diverges from its neighbors. The current data suggests a repeat performance may be starting.

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Sweden’s March flash inflation was below market forecasts. CPIF slowed to 1.6% year on year, versus 2.2% expected, while CPIF excluding energy fell by 0.3 percentage points to 1.1% year on year, versus 1.5% expected.

The fall was mainly linked to lower prices for food and for recreation, sport and culture. Petrol prices rose and added to the headline CPIF measure.

The Riksbank had recently taken a more hawkish stance. If the weaker inflation readings persist, policymakers may keep rates unchanged for longer than previously indicated.

The article was produced using an AI tool and reviewed by an editor.

We are seeing a significant downside surprise in the March inflation figures for Sweden, with the main CPIF measure decelerating to just 1.6% year-over-year. This reading is well below market expectations of 2.2% and challenges the central bank’s recently hawkish tone. The core measure, excluding energy, fell even more sharply to 1.1%, suggesting underlying price pressures are weak.

This data forces a repricing of interest rate expectations, as the Riksbank is now far less likely to tighten policy in the near term. For traders, this suggests positioning for a prolonged hold by receiving fixed on Swedish interest rate swaps or unwinding any bets on rate hikes for the second quarter. With the policy rate currently at 3.75%, the market is now pushing back the timeline for any potential move upwards.

The Swedish Krona should weaken as a result of these diminished rate hike prospects. We have already seen the EUR/SEK cross jump from around 11.48 to above 11.62 in the wake of the inflation report. Traders should consider strategies that benefit from further SEK downside, such as buying EUR/SEK call options or establishing short SEK positions against currencies with a more hawkish central bank outlook.

Looking back, we remember the aggressive rate-cutting cycle the Riksbank pursued through 2025 to combat slowing growth. The market had been positioning for a shift away from that dovishness, but this weak inflation print puts that narrative on hold. This surprise is a reminder of the disinflationary trends we saw globally in the latter half of last year.

This unexpected data shock will likely boost implied volatility in both rates and FX markets. The uncertainty around the Riksbank’s next meeting in early May creates opportunities for options traders. One could buy volatility through straddles on the SEK to profit from a large move, regardless of direction, as the central bank digests this new information.

The weakness in consumer-facing categories like food and recreation, combined with the latest labor force survey from Statistics Sweden showing unemployment ticking up to 7.8%, paints a picture of a softening domestic economy. This reinforces the view that the Riksbank cannot afford to maintain a hawkish stance. We must now weigh the impact of higher global energy prices against this clear evidence of cooling domestic demand.

The United States Redbook Index (YoY) rose to 7.6% on April 3. It was 6.9% in the previous reading.

The recent Redbook data from April 3rd shows a significant jump in consumer spending, rising to a robust 7.6% year-over-year. This signals that the consumer remains unexpectedly strong, which could easily fuel inflationary pressures. Consequently, we must reconsider the Federal Reserve’s likely path for the remainder of 2026.

Rates Higher For Longer

This strong spending likely means the market will price out any near-term rate cuts, especially with the March CPI report coming in hotter than expected at 3.4% last month. We should be looking at options on SOFR futures, positioning for the “higher for longer” narrative to gain more traction. Short-term Treasury futures may also face significant downward pressure in the coming weeks.

For equity indices, this creates a scenario where good economic news could become bad news for valuations. The threat of a more hawkish Fed is a major headwind, much like what we saw after the surprise jobs report in the autumn of 2025, which caused a sharp market pullback. We could see increased choppiness, making strategies on the VIX that bet on a rise in volatility look attractive.

We believe the most direct trades are in sector-specific derivatives, especially since March retail sales also beat expectations last week, growing by 0.9%. Call options on consumer discretionary ETFs appear favorable for a short-term momentum play. Conversely, we should consider put options on rate-sensitive sectors like utilities and REITs, as they will almost certainly underperform if bond yields continue their upward trend.

Sector Trades And Volatility

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US durable goods orders fell 1.4%, or $4.4 billion, to $315.5 billion in February, according to the US Census Bureau. This followed a 0.5% fall in January and was weaker than the expected 0.5% drop.

Excluding transportation, new orders rose 0.8%. Excluding defence, new orders fell 1.2%.

Transportation Sector Drives February Decline

Transportation equipment fell by $6.1 billion, or 5.4%, to $106.1 billion, and has declined in four of the last five months. This drove the overall fall in durable goods orders.

After the release, the US Dollar showed little change. The USD Index was slightly lower at 99.92 at the time of reporting.

We remember seeing similar data back in early 2025, when a 1.4% drop in durable goods orders signaled a manufacturing slowdown. We are now seeing an echo of that, with the most recent March 2026 report showing a 1.2% decline, which disappointed analysts who had forecasted a small increase. This pattern confirms a cooling trend that has been building over the last few months.

This weakness is particularly concerning because it comes as the latest Consumer Price Index (CPI) report shows inflation remaining persistent at 3.1%. This presents a dilemma for the Federal Reserve ahead of its next meeting, making the path for interest rates much less clear than it was at the start of the year. This uncertainty is what we believe will drive the market for the next several weeks.

Volatility Rising As Markets Reprice Risk

As a result, implied volatility is on the rise, with the VIX index moving from the low 14s to around 18 in just the last ten trading days. This signals that the market is actively pricing in the potential for larger price swings in the near future. For those holding large equity positions, this is a clear signal to consider adding downside protection.

Looking back at the 2025 report, the transportation sector was a major source of weakness, a trend that is re-emerging in current industrial activity. We are therefore considering purchasing put options on industrial sector ETFs to hedge against further softness in this area. This allows for protection while limiting the capital at risk.

The key takeaway is that economic data has become less reliable, creating a choppier environment than we saw throughout last year. This market favors strategies that can profit from increased volatility, such as straddles on major indices, rather than simple directional bets. We will be watching the upcoming jobless claims and consumer sentiment data very closely for the next signal.

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US durable goods orders fell 1.4%, or $4.4 billion, to $315.5 billion in February, according to the US Census Bureau. This followed a 0.5% fall in January and was worse than the expected 0.5% decline.

Excluding transportation, new orders rose 0.8%. Excluding defence, new orders fell 1.2%.

Durable Goods Detail

Transportation equipment fell by $6.1 billion, or 5.4%, to $106.1 billion. This category has declined in four of the last five months.

The data had little effect on the US dollar at the time reported. The US Dollar Index was slightly lower on the day at 99.92.

We recall looking at the durable goods report from February 2025, which showed a significant 1.4% headline decline. That drop was almost entirely due to transportation orders, which masked some underlying strength in other business investment. It was an early warning signal about weakness in big-ticket manufacturing.

Looking at the situation today, the most recent data for February 2026 shows a similar, though less dramatic, pattern of industrial softness. New orders for non-defense capital goods excluding aircraft, a key proxy for business spending, have been flat for two consecutive quarters. This suggests corporate caution is becoming entrenched, much like the trend that began in early 2025.

Market And Policy Implications

This manufacturing slowdown is happening while the latest Consumer Price Index (CPI) report showed core inflation remaining sticky at 3.1%. This dynamic puts the Federal Reserve in a difficult position, unable to cut interest rates to support industry without risking a resurgence in inflation. Consequently, futures markets are now pricing in only one potential rate cut for the remainder of 2026.

For traders, this points toward a strategy of buying volatility, especially within the industrial sector. Purchasing straddles or strangles on major industrial ETFs allows a position to profit whether the sector breaks sharply lower on recession fears or rips higher on a surprise stimulus. The current tension between slow growth and hawkish monetary policy makes a period of calm unlikely.

Given the specific and continued weakness in transportation, bearish derivative plays on aerospace and heavy machinery manufacturers should be considered. We see value in buying put options on companies that have a high backlog but are facing order cancellations, a trend we saw beginning last year. This provides a targeted way to short the most vulnerable part of the economy without betting against the entire market.

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