Energy Prices Supporting Canadian Outlook
The firm said a recent rise in energy prices has partly offset negative sentiment. It added that higher energy prices have removed most of the expected rate cuts priced into the front end of the Canadian market. It said Bank of Canada Governor Tiff Macklem has stressed high uncertainty in 2026 and has kept policy options open. It added that a worsening geopolitical environment may sustain the current level of uncertainty. Ongoing CUSMA negotiations are generating headlines, but incremental changes in trade policy are unlikely to alter the broader growth outlook. We see manufacturing’s share of GDP, last reported by Statistics Canada at 9.8% for Q4 2025, as too small to be the main driver. Business investment was already a weak spot before the trade disputes of 2025, so this uncertainty is not a new headwind. The key factor for the Canadian dollar right now is the recent surge in energy prices, which is offsetting much of the macroeconomic anxiety. With WTI crude climbing above $95 a barrel in February 2026, sentiment has shifted considerably, removing most of the central bank rate cut pricing we saw earlier in the year. This improvement in our terms of trade provides a powerful support for the economy.Rates Markets Repricing Bank Of Canada Path
For interest rate traders, this means unwinding any bets on near-term easing from the Bank of Canada. The overnight index swap market is now pricing in less than a 25% probability of a rate cut before July, a sharp reversal from the nearly 75% chance priced in at the start of the year. We should therefore consider positioning for a hawkish hold from Governor Macklem in the coming months. Governor Macklem’s nervous tone and emphasis on a deteriorating geopolitical environment suggests volatility will remain elevated. We saw a similar pattern in 2025 where implied volatility on CAD/USD options spiked around key data releases. This backdrop favors buying volatility through options, such as straddles, ahead of the next CPI report or Bank of Canada policy meeting. Create your live VT Markets account and start trading now.
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