USD/CAD traded with a mild downside bias on Wednesday ahead of the Bank of Canada (BoC) rate decision at 13:45 GMT. The pair was near 1.3672, with the Canadian Dollar supported by rising oil prices.

The US Dollar held small gains ahead of the Federal Reserve decision at 18:00 GMT. The US Dollar Index was about 98.70.

Central Bank Decisions In Focus

Both central banks are widely expected to keep rates unchanged while assessing how higher energy prices affect inflation expectations. Markets are watching forward guidance, as a more hawkish BoC could support the Canadian Dollar and the Fed’s message could steer the US Dollar.

Near-term movement may also be affected by developments linked to US-Iran tensions. The two policy announcements are expected to lift volatility in USD/CAD.

On the daily chart, USD/CAD stayed below the 100-day and 50-day SMAs at 1.3730–1.3733, with the 200-day SMA near 1.3818/1.3820. RSI was in the low-40s and MACD was negative.

Support was seen near 1.3600, then 1.3500. Resistance levels were 1.3730, 1.3733, and 1.3820.

Looking Back And Positioning Ahead

Looking back to 2025, we saw the USD/CAD pair pressured by a cautious Bank of Canada and the influence of oil prices. Now, in late April 2026, a similar dynamic is unfolding, presenting opportunities for traders who watch central bank policy closely. The market has shifted its focus from whether rates will be held to the specific timing of future rate cuts.

With Canadian inflation proving persistent at 2.9% as of the last report, the Bank of Canada is unlikely to signal an imminent rate cut from its current 4.25% policy rate. The US Federal Reserve faces a similar challenge with inflation at 3.4%, keeping its own policy rate higher at 4.75% and pushing back market expectations for cuts. This divergence creates a tense environment where any new data point can trigger volatility in the currency pair.

The Canadian dollar is receiving significant support from robust crude oil prices, with WTI currently trading firmly above $85 a barrel. Historically, such as during the commodity boom of 2022, sustained high energy prices have provided a strong tailwind for the loonie. Derivative traders should consider that if oil prices remain elevated, this will continue to act as a powerful anchor against Canadian dollar weakness.

Given the uncertainty surrounding the timing of rate cuts, implied volatility in USD/CAD options is likely to rise ahead of upcoming central bank meetings in May and June. Traders who anticipate that high oil prices and a cautious BoC will push the pair lower could consider buying put options to capitalize on a downward move while defining their risk. This strategy allows for profiting from a stronger Canadian dollar without the exposure of shorting the pair directly.

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The Federal Reserve is expected to keep the Fed Funds Rate unchanged at 3.50–3.75%, with Jerome Powell set to hold his final press conference as Chair. Discussion centres on Kevin Warsh’s policy approach, including focus on trimmed-mean inflation and AI-related productivity gains.

On 24 April, the Department of Justice dropped its probe into the Fed’s building renovations. This was followed by Republican Senator Thom Tillis moving from blocking to endorsing Warsh on 26 April, which affects Powell’s decision on whether to remain a Governor until January 2028.

Policy Framework Shift

Warsh has proposed shifting emphasis away from core PCE inflation towards trimmed-mean inflation, while also pointing to AI productivity and a barbell approach of lower interest rates alongside balance-sheet reduction. The argument frames energy-price risks linked to war as less central to the policy outlook.

The approach is compared with Alan Greenspan’s move towards the Core PCE deflator in the 1990s, when it ran lower than CPI and was used to support a more accommodative stance during productivity gains. The piece also states the USD could lose its haven premium if data point to an oil supply glut that supports the next Chair’s policy shift.

With the Federal Reserve holding rates steady at 3.50-3.75%, the immediate focus for us has shifted to the upcoming change in leadership. Jerome Powell is on his way out, and Kevin Warsh is poised to take over, signaling a significant policy pivot away from what we saw through 2025. This transition is the most critical variable for positioning in the weeks ahead.

The incoming Chair’s framework is a major departure, as he intends to sideline core PCE in favor of trimmed-mean inflation and AI-driven productivity gains. Recent data supports this view, with the Dallas Fed’s Trimmed Mean PCE rate for March 2026 falling to 2.4%, well below the headline PCE rate of 2.9%. This gives Warsh the justification he needs to advocate for lower rates even if other inflation measures remain elevated.

Market Positioning Implications

This proposed strategy of cutting rates while shrinking the balance sheet is already being priced into the market. Fed funds futures now indicate a greater than 75% probability of a 25 basis point rate cut by the July meeting. We should therefore consider positioning in interest rate derivatives, such as SOFR futures or options, that will profit from a decline in short-term rates sooner than previously expected.

Warsh’s argument mirrors the Alan Greenspan era of the late 1990s, where a productivity boom allowed for a more accommodative policy. First-quarter 2026 productivity numbers came in at a robust 3.5% annualized rate, bolstering the case that AI is creating deflationary pressures that can offset inflation. This historical parallel suggests a period of lower rates alongside a strong economy, a favorable environment for risk assets.

Furthermore, the US dollar’s status as a safe haven is eroding as the energy shock from last year subsides. WTI crude prices have recently fallen below $80 per barrel from over $90 earlier in the year, as concerns shift toward a potential supply glut from increased non-OPEC production. This development removes a key pillar of dollar strength.

Given these dynamics, we see opportunities in currency options that bet against the dollar, particularly against currencies with central banks that are likely to remain hawkish. At the same time, we should look at trades that benefit from falling interest rate volatility, as the new Fed leadership appears to be telegraphing a clear and predictable path toward easing. This suggests selling straddles on Treasury futures could be a viable strategy.

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The Canadian dollar has stayed relatively stable against the US dollar since the Middle East conflict started. Markets expect the Bank of Canada to leave interest rates unchanged, while adopting a more hawkish stance.

The Bank of Canada is set to release its Monetary Policy Report alongside the decision. The report is expected to revise GDP growth lower for this year and revise inflation higher.

Energy prices are expected to fall back in a de-escalation scenario, but remain above pre-conflict levels due to ongoing geopolitical risk pricing. This would leave inflation higher than pre-conflict assumptions and harder to ignore.

The Strait of Hormuz remains closed, while risk assets have stayed resilient. In this context, the Bank of Canada is expected to be more hawkish than in March and place greater weight on upside inflation risks.

Short-term market positioning leans towards the US dollar on the risk of renewed conflict and higher crude oil prices. The latest IMM data showed the largest weekly Canadian dollar selling by Leveraged Funds since July 2024.

In a renewed escalation, the Canadian dollar may lag the US dollar, but moves are expected to be more modest than in other energy-importing G10 currencies. The article was produced using an AI tool and reviewed by an editor.

With the Bank of Canada meeting approaching, we are not expecting a change in interest rates but are preparing for a more hawkish tone. Canada’s latest CPI print for March 2026 came in hotter than expected at 3.1%, putting upward pressure on the central bank to address inflation. This backdrop makes it unlikely the BoC will signal any rate cuts in the near future.

The primary driver for inflation remains elevated energy prices, stemming from the ongoing Middle East conflict. With WTI crude prices holding firm above $95 a barrel, the market is pricing in a persistent geopolitical risk premium that the Bank of Canada can no longer ignore. Even if tensions ease, we believe oil will settle at a higher base level than before the conflict began.

In the immediate weeks, a bias toward the US dollar seems prudent, especially if the conflict re-escalates. The latest positioning data shows leveraged funds increasing their short positions on the Canadian dollar, a move reminiscent of the large CAD selling we saw back in July 2024. Therefore, traders could consider using futures or options to position for a move higher in the USD/CAD pair.

However, selling the Canadian dollar outright is a risky strategy, as it is likely to outperform other G10 currencies in a high oil price environment. Given that countries like Japan and Germany import over 90% of their energy needs, their currencies remain far more vulnerable to an oil shock than the CAD. This suggests looking at derivatives that favour CAD against the Euro or the Yen could be a sound relative value trade.

The uncertainty surrounding the geopolitical situation means volatility will likely increase. We only have to look back to the initial conflict escalation in late 2025 to see how currency volatility spiked sharply. This suggests that buying options, like straddles on USD/CAD, could be a prudent way to position for a significant price move in either direction without betting on the outcome of the conflict itself.

TD Securities’ Global Strategy Team expects the Federal Reserve to keep the policy rate at 3.50–3.75% at the April FOMC meeting. It cites balanced labour markets and a rise in headline inflation linked to an oil shock.

The team expects the Committee to repeat a patient approach due to ongoing uncertainty. It also expects Chair Powell to keep a neutral stance on future policy.

Expected Market Reaction

TD Securities says rates may react only modestly to the Fed decision itself. It adds that rates could keep moving on news from the Middle East.

The note says the Senate Banking Committee will vote on Kevin Warsh’s nomination at 10am EST. It adds that markets will watch the Fed press conference for any comments about Powell’s succession, as this may be his last meeting as chair.

The article states it was created with the help of an AI tool and reviewed by an editor.

Looking back at the Fed’s patient stance in April 2025, when the policy rate was 3.50-3.75%, feels like a different era. We are now grappling with the consequences of inflation that proved much stickier than anticipated following that period. The market’s current expectation is for a prolonged hold at a significantly higher rate, a stark contrast to the neutral tone we saw from former Chair Powell.

Inflation And Labor Market Crosscurrents

The oil shock mentioned last year was just the beginning, as core inflation remained stubbornly high through late 2025 and into this year. We saw core CPI hover near 3.8% for months, a level the new Fed Chair has signaled is unacceptable for considering any cuts. This persistence means traders should be wary of pricing in any dovish pivot soon.

Unlike the balanced labor market of early 2025, we are now seeing clear signs of softening. Recent non-farm payrolls have missed expectations, and the unemployment rate has crept up to 4.1% from the sub-4% levels seen consistently last year. This dynamic creates uncertainty, as the Fed is now fighting inflation even as the employment picture weakens.

This environment suggests positioning for higher volatility in the weeks ahead. With the Fed caught between sticky inflation and a slowing job market, implied volatility on interest rate options, such as those on SOFR futures, is likely to rise. We are already seeing the VIX index trade consistently in the high teens, a notable increase from the calmer period of spring 2025.

The leadership change at the Fed has clearly introduced a more hawkish bias than we saw during Powell’s final meetings. Traders should consider strategies that benefit from a flat or inverted yield curve, as the front end remains anchored by the Fed’s resolve. Any hint of weakness from the new Chair could cause a significant repricing, but for now, the path of least resistance appears to be higher-for-longer.

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US durable goods orders rose by $2.6 billion, or 0.8%, in March to $318.9 billion, according to the US Census Bureau. This followed a 1.2% fall in February and was above the forecast increase of 0.5%.

Excluding transportation, new orders increased 0.9%. Excluding defence, new orders decreased 0.3%.

Durable Goods Detail

Computers and electronic products rose by $1.0 billion, or 3.7%, to $29.6 billion. This category has increased in 11 of the last 12 months.

The US Dollar Index showed little reaction to the data. At the time of reporting, it was up 0.1% on the day at 98.70.

The March durable goods report showed a headline increase of 0.8%, but we see underlying private sector softness since orders fell 0.3% when excluding defense spending. The US Dollar’s flat response tells us the market is focused on bigger issues. This data point alone is not enough to build a new trading position around.

We must place this report in the context of more important recent data. The latest Consumer Price Index reading showed inflation remains persistent at 3.5%, and the last jobs report revealed the economy added a surprisingly strong 303,000 positions. These figures are what is truly driving the market’s thinking, as they push back any expectation of near-term interest rate cuts from the Federal Reserve.

Rates Market Implications

This environment suggests that the Fed will hold rates steady, making interest rate derivatives a key area of focus. We should anticipate continued choppiness in Treasury futures as the market digests the “higher for longer” rate narrative. Options strategies on SOFR futures that bet on a lack of rate cuts in the next quarter appear sensible.

For equities, the strength in computers and electronics orders is a positive sign specifically for the tech sector. This could provide some support for Nasdaq futures or call options on tech-heavy indices. However, the broader market, represented by the S&P 500, may struggle under the weight of sustained high interest rates.

The dollar is likely to remain in a holding pattern until the next major inflation or employment data is released. This suggests that implied volatility on major currency pairs will remain low in the immediate term. Traders could use this period to position for a potential spike in volatility around the mid-May CPI report.

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US building permits rose by 11% in February, after a fall of 5.4% in the previous period.

The change shows a move from a decline to growth in permits issued.

Building Permits Rebound Signals Housing Momentum

We are seeing a major reversal in US building permits, jumping 11% in February after falling 5.4% the month before. This is a strong leading indicator, suggesting a sharp pickup in economic activity is on the way for the spring and summer. This kind of surprise data points to renewed confidence in the housing sector.

The most direct trade is to bet on homebuilders and construction suppliers. We should look at buying May and June call options on ETFs like the SPDR S&P Homebuilders ETF (XHB). We saw this exact pattern in mid-2023, when unexpectedly strong housing data led to a 15% rally in the XHB over the following quarter.

This strength likely signals a healthier overall economy, which should support broader market indices. Call options on the S&P 500 (SPY) could be a good play, as robust construction activity often precedes gains in employment and consumer spending. Looking back from 2025, we remember how the housing boom of 2021 was a key driver of the wider market rally.

However, this surprisingly strong data could force the Federal Reserve’s hand on interest rates. Fears of economic overheating will rise, making future rate cuts less likely. We should consider buying put options on long-duration Treasury bond ETFs like the iShares 20+ Year Treasury Bond ETF (TLT), anticipating that bond prices will fall as the market prices out rate cuts.

This level of economic surprise is bound to increase market choppiness in the coming weeks. A simple strategy is to bet on rising volatility by purchasing call options on the CBOE Volatility Index (VIX). We saw the VIX spike over 20% on several occasions back in 2022 following economic reports that challenged the consensus view on inflation and Fed policy.

Possible Volatility And Rate Risks Ahead

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US housing starts fell to 1.356 million in February. This was down from 1.487 million in the previous month.

The month-on-month change shows a decline in new residential construction starts. The data compares February with the prior month’s level.

Housing Starts Signal Growth Cooling

We see that the February 2026 housing starts data showed a sharp decline. This figure, dropping to 1.356 million, is a significant miss from the previous month and suggests high interest rates are finally cooling the economy. It serves as a strong signal that the economic resilience we observed through much of 2025 might be fading.

In response, we should anticipate a shift in Federal Reserve policy expectations. Traders will likely begin pricing in earlier interest rate cuts, so positions that benefit from falling yields, such as long-term Treasury futures, are now more attractive. As of late April, the market was still only pricing in one cut in the fourth quarter, creating a clear opportunity if this economic weakness continues.

We should consider defensive positions in the equity markets given that housing is a leading economic indicator. This means buying put options on broad market indices like the SPX or on sector ETFs directly exposed to construction, such as XHB for homebuilders. We’ve seen mortgage applications fall for three consecutive weeks in April 2026, reinforcing this bearish outlook for housing-related stocks.

Volatility Hedging Amid Policy Uncertainty

This conflict between slowing growth and the Fed’s recent comments on sticky inflation will likely increase market uncertainty. An increase in expected volatility makes buying call options on the VIX index a sensible hedge over the next several weeks. Historically, sharp drops in leading indicators like housing precede periods of higher market volatility, a pattern we saw during the slowdowns in both 2006 and 2018.

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US building permits fell to 1.372 million month on month in March. This was below the expected 1.39 million.

The gap between the actual figure and the forecast was 0.018 million permits. The release shows permits came in under market estimates for the month.

Housing Momentum Turns Lower

The March building permits miss at 1.372 million suggests a clear cooling in the housing sector. This data point is a forward-looking indicator for economic activity, raising questions about the economy’s strength heading into the second quarter. We see this as a potential early sign of a slowdown that the market has been anticipating.

We view this weakness as a challenge to the Federal Reserve’s firm stance, especially with the latest core CPI inflation data holding around 3.1%. Traders are now adjusting expectations away from the “higher for longer” narrative that followed the rate stabilization we saw in 2025. Interest rate futures now reflect an increased probability of a rate cut before the end of the year.

In response, we are considering bearish option strategies on homebuilder ETFs and related retail stocks. Companies in this space, which enjoyed a significant recovery in late 2025, now face headwinds from slowing demand. Buying put options on major homebuilders or home improvement stores could be a direct way to position for this anticipated weakness in the coming weeks.

This unexpected data also introduces broader market uncertainty, which could fuel volatility. We anticipate a potential rise in the CBOE Volatility Index (VIX) from its current levels. Consequently, purchasing VIX call options or futures could serve as an effective hedge against a wider market pullback driven by these renewed economic concerns.

Positioning For Higher Market Volatility

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US building permits rose month on month in February. They increased from 1.376M to 1.538M.

This indicates a higher number of permits issued compared with the previous month. The change was 0.162M permits.

Housing Market Strength Emerges

The jump in February’s building permits to 1.538 million shows unexpected strength in the housing market. This is a leading indicator, suggesting construction activity will be robust into the spring and summer. We should view this as a positive signal for the broader economy.

This strength in housing trickles down to companies that supply materials and labor, pointing to potentially higher corporate earnings in related sectors. The data suggests underlying economic demand is more resilient than many had anticipated at the start of the year. This challenges the narrative of a significant slowdown.

With economic activity holding up, the Federal Reserve will be in no hurry to cut interest rates. Recent inflation data from March showed the Consumer Price Index is still hovering around 3.1%, well above the Fed’s target. This housing data adds another reason for the Fed to remain cautious, keeping rates higher for longer.

For traders, this suggests opportunity in call options on homebuilder ETFs like XHB, which has already climbed over 8% this year. Looking back, we saw a similar surge in early 2025 that preceded a strong second quarter for these stocks. This pattern suggests betting on continued upward momentum in the housing sector.

Rates And Bonds Outlook

The prospect of sustained higher interest rates makes fixed-income instruments less attractive. The 10-year Treasury yield just touched 4.5% for the first time since last fall, reflecting this sentiment. Traders might consider buying put options on bond ETFs like TLT to capitalize on the potential for yields to climb further.

This report also has direct implications for commodities, especially lumber. Increased building activity directly translates to higher demand for raw materials. We saw lumber futures spike dramatically back in 2024 when housing starts unexpectedly jumped, and a similar setup could be forming now for a long position in lumber futures.

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US housing starts rose by 10.8% in February, up from 7.2% previously.

The change means the February growth rate was 3.6 percentage points higher than the earlier figure.

Housing Starts Surprise And Fed Implications

The housing starts number for February came in much stronger than anyone expected, showing a 10.8% jump. This suggests the economy is running hotter than anticipated, which could lead to renewed inflation worries. For us, this makes it less likely the Federal Reserve will consider cutting interest rates anytime soon.

Given this, we should anticipate higher interest rates for longer, a sentiment that has pushed the 10-year Treasury yield towards 4.7% in recent weeks. Traders should consider positioning for yields to rise further by selling Treasury note futures or buying put options on bond ETFs. This data from February, even though two months old, confirms the economic resilience that has been defying calls for a slowdown.

This environment creates a push-and-pull for the broader stock market, often leading to choppiness. We saw similar indecision throughout 2025 when strong economic reports were met with fears of Fed tightening. Therefore, buying options that profit from increased market volatility, like calls on the VIX index, could be a prudent move for the coming weeks.

We should look closely at derivatives tied to sectors that benefit directly from this news, like homebuilders and materials. Call options on homebuilder ETFs, which are already up nearly 12% in 2026, could see increased buying pressure. This also applies to companies supplying lumber and copper, as demand is clearly holding up better than forecast.

Dollar Strength And Positioning

A stronger U.S. economy with higher interest rates typically means a stronger U.S. dollar. This February report reinforces the dollar’s recent strength, which has seen it gain over 4% against a basket of currencies since the start of the year. We should consider long positions on the dollar through futures contracts or by buying calls on dollar index ETFs.

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