Oil Rally Alters Policy Outlook; BoC May Hit Pause on Rate Cuts

Summary:

As Middle East tensions drive up international oil prices, Canada’s economic and inflation outlook has shifted. As a major oil exporter, Canada stands to benefit from higher energy prices, prompting institutions to revise their policy expectations for the Bank of Canada (BoC).

BUY USDCAD

EXP

PENDING

1.36000

Entry Price

1.39580

1.34000

1.37215 +0.00843 +0.62%

Pips

PENDING

1.34000

Exit Price

1.36000

Entry Price

1.39580

Fundamentals

Rising international oil prices are altering market expectations for Canada’s monetary policy path. This view is driven mainly by the positive impact of energy prices on Canada’s economy. Military conflicts in the Middle East have lifted global oil prices. Canada, as a key oil exporter, will benefit significantly.

Although higher oil prices may create some inflationary pressure, we believe the BoC is unlikely to respond with rate hikes. Higher energy prices tend to strengthen the Canadian dollar, and a stronger exchange rate will partially offset imported inflation, easing the impact of rising prices on the domestic economy.

However, near-term data suggests Canada’s domestic economy still faces headwinds. The latest labor market indicators point to a mild softening in employment in February, with trade-related sectors hit particularly hard. Manufacturing is under the most stress, while the transportation sector may also be affected in the coming period.

Business confidence surveys also reflect cautious corporate sentiment. The Q4 2025 Business Outlook Survey shows weak hiring intentions, falling job vacancies, and persistent labor shortages. The market expects employment to decline by roughly 10,000 in February, with the unemployment rate edging up to 6.6%. The sharp drop in labor force participation in January is seen as a one-off event, with a similar move unlikely in the near term.

Under our baseline scenario, the BoC is still expected to maintain an overall dovish policy stance. However, sustained high oil prices could lead to a reassessment of growth and inflation forecasts, significantly altering the policy outlook.

Notably, policy shifts typically require trend confirmation. Markets generally expect oil prices to remain elevated for at least one to two months before the BoC reconsiders its stance. The upcoming BoC policy meeting on March 18 is therefore likely too early for policymakers to deliver a firm judgment on the long-term impact of energy prices.

Oil Rally Alters Policy Outlook; BoC May Hit Pause on Rate Cuts_1

Technical Analysis

The intraday outlook for USDCAD is neutral. Following the break below the MA55, downside risks were expected to persist as long as resistance at 1.3751 held, even during rebounds.

However, three consecutive daily sessions with long lower shadows indicate fading downward momentum, with a bounce-back likely to dominate in the coming sessions.

Trade Recommendations

Trade Direction: Buy

Entry Price: 1.3600

Target Price: 1.3958

Stop Loss: 1.3400

Valid Until: April 12, 2026, 23:55:00

Support: 1.3524/1.3504/1.3481

Resistance: 1.3651/1.3716/1.3753

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