Canada Central Bank May Maintain Steady Rates as Markets Watch Cautiously, Iran Conflict Drives Oil Price Volatility in CAD and Yields

Huitong Finance APP News — According to Huitong Finance APP reports, TD Securities strategists expect the Bank of Canada to keep the overnight rate unchanged at 2.25% and adopt a cautious tone, as economic growth and inflation are both below the bank’s previous forecasts. They particularly emphasize that uncertainty has significantly increased, with new inflation risks stemming from the Iran conflict and higher oil prices. Oil price fluctuations are seen as the main driver of short-term Canadian yields.

The strategists further note that policy will remain on hold, and any dovish statements need to be balanced with acknowledgment of new inflation risks. Oil price volatility will continue to dominate the near-term yield movements, and the Bank of Canada is expected to wait longer to respond to persistent uncertainties. Before the meeting, they favor shorting the Canada-U.S. 10-year bond spread and positioning for a narrowing of the 3s5s swap spread. Meanwhile, market focus will remain on geopolitical developments, with the Canadian dollar expected to outperform other major currencies (excluding the US dollar), benefiting from its positive correlation with high oil prices and a lower risk aversion beta.

Latest market data shows that, as of March 2026, the Bank of Canada overnight rate has stabilized at 2.25%. The consensus at this week’s meeting is fully aligned with holding steady, and market pricing for the next move has been pushed back to the second half of the year. Oil price fluctuations have become the core variable in short-term yield curve pricing.

To clearly compare policy paths and multi-dimensional impacts, the following table presents key indicators (including interest rate levels, tone positioning, inflation risk transmission, oil price driving effects, CAD outlook, yields, and geopolitical scenario assumptions):

From an in-depth analysis perspective, the Iran conflict has directly pushed up global oil prices. While Canada, as an energy exporter, benefits from rising oil prices, imported inflation risks and supply chain uncertainties have already significantly exceeded the bank’s previous forecasts. TD Securities strategists emphasize that, in the context of economic growth and inflation both being below projections, the Bank of Canada chooses cautious observation rather than immediate easing, to avoid amplifying volatility with premature dovish signals. It is reasonable to expect that if oil prices remain volatile at high levels, daily yields could rise by 5-10 basis points, and the Canadian dollar, with its positive correlation to oil prices and lower risk aversion beta, will continue to outperform currencies like the euro and pound. Conversely, if the conflict eases in mid to late April, yield pressures will quickly ease, and the market’s clean positioning will further boost the CAD.

On the other hand, global geopolitical focus continues to dominate market narratives. The Bank of Canada is expected to reinforce a “wait longer” signal through statements, leaving room for gradual adjustments later. Traders generally believe that if oil price volatility persists, short-term yields will face downward pressure but the resilience of the CAD will continue, providing a clear risk-reward framework for fixed income and forex investors.

Summary

While the Iran conflict and oil price fluctuations have increased uncertainty, the Bank of Canada’s cautious stance of maintaining a 2.25% rate has shaped the dynamic balance of short-term yields and exchange rates. Future trends depend on the pace of conflict development and the actual transmission strength of oil prices. Market participants should continue to monitor geopolitical developments and central bank communications closely.

【Frequently Asked Questions】

Q1: Why does the Bank of Canada expect to keep the overnight rate at 2.25% and adopt a cautious tone?

A: TD Securities strategists point out that both economic growth and inflation are below the bank’s projections. Coupled with the new uncertainties from the Iran conflict, the policy needs to remain on hold to avoid prematurely signaling dovishness. The statement will balance any dovish elements with acknowledgment of new inflation risks, ensuring market expectations are not misled and leaving room for future data validation. This cautious stance is currently the best approach given the macro environment.

Q2: How do the Iran conflict and oil price fluctuations become the main drivers of short-term yields?

A: The conflict directly amplifies energy price volatility, which through import channels raises Canadian inflation expectations and influences the yield curve. Strategists clearly state that oil price fluctuations will dominate near-term pricing; sustained high levels could push yields up by 5-10 basis points, while easing tensions will quickly relieve pressure. This driver far exceeds traditional domestic data and has become the market’s short-term focus.

Q3: Why is the CAD expected to outperform other major currencies (excluding the USD)?

A: The CAD’s positive correlation with high oil prices and its lower risk aversion beta support its relative strength. Under geopolitical tensions, Canada’s energy export nature makes the CAD more resilient in risk-averse environments, and it is expected to continue outperforming currencies like the euro and pound, creating a short-term advantage window.

Q4: If the Iran conflict eases quickly, what changes might occur in Canadian yields and the CAD?

A: Easing will quickly reduce oil price volatility, leading to a decline in yields and a shift from a cautious to a more moderate stance by the central bank. Spread trades may profit from this adjustment; although the CAD benefits from oil price correlation in the short term, a rise in risk appetite will support its continued outperformance over non-US currencies.

(Edited by: Wang Zhiqiang HF013)