Canadian Policy Outlook
Canada’s employment report on Friday is expected to show only a modest rebound and could move markets. Domestic events also include the March Labour Force Survey. A 5-year auction is expected to be a factor in the background and may add pressure on duration during the week. The stance remains positioned long Canadian 2-year bonds while tracking developments in the Middle East and incoming domestic data. Canadian rates are opening weaker, with yields climbing a few basis points to start the week. This is a direct echo of the US market, which is still reacting to the strong March payrolls report from last Friday that showed over 275,000 jobs were added. We see this trend of following US sentiment continuing in the near term. We expect most of the market’s turbulence in the coming weeks to be imported from the United States. All eyes will be on the upcoming US inflation data, which is forecasted to show core CPI remaining stubbornly above 3%, keeping pressure on the Federal Reserve. Any surprise in that American report will likely have a much bigger impact on our market than domestic drivers.Positioning And Key Risks
Looking back, we saw the Bank of Canada hold rates firm throughout most of 2025 to ensure the inflation that spiked a few years prior was truly beaten. That long pause has now given way to intense speculation about the timing of the first rate cut in this new cycle. This uncertainty about when the Bank will finally move is creating opportunities in the front end of the curve. Because of this, we continue to be biased toward being long 2-year Canada bonds, or equivalent derivatives. This position benefits if the market increases its bets on a Bank of Canada rate cut happening later this year, especially as our own inflation has cooled to 2.8%. It is a bet that our economic path will eventually have to diverge from the hotter US economy. However, we must watch for external shocks, particularly from the Middle East, where ongoing ceasefire negotiations could easily send WTI crude oil prices back above the $90 mark. This Friday’s Canadian Labour Force Survey could also shift expectations, but it would need to be a major surprise from the consensus forecast of a 15,000 job gain to truly change the narrative. The upcoming 5-year government bond auction will also add some temporary weight on rates this week. Create your live VT Markets account and start trading now.
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