Economic Outlook and Summary
February delivered the geopolitical shock markets had been quietly dreading. In the final hours of the month, the United States and Israel launched "Operation Epic Fury," a large-scale coordinated air campaign against Iran that killed Supreme Leader Ayatollah Ali Khamenei and numerous top IRGC commanders. Iran retaliated with drone and missile strikes against U.S. military installations across the Gulf. Bahrain, Qatar, the UAE, and Kuwait came under attack. The Republican Guard declared the Strait of Hormuz closed to commercial shipping, which is a major blow as tanker traffic through the Strait carries roughly 20% of the world's seaborne oil flows.
At the beginning of February, the Bank of England left its benchmark rate unchanged at 3.75% but left the door wide open to a rate cut on March 19. The European Central Bank (ECB) looked at tame inflation numbers and held monetary policy steady. The US dollar index (DXY) had been drifting lower for much of February on Fed-cut expectations but ended the month sharply higher due to an explosion in safe-haven demand for dollars.
March begins with the war in Iran as the single dominant variable in global markets. Traders will be less focused on central bank policy paths and economic data due to uncertainty about the impact of the Iran war on global supply chains and global growth.
The USD and Federal Reserve
The U.S. dollar entered March with a bid due to Trump’s war on Iran. The DXY see-sawed in a 96.67-97.03 range for all of February, then spiked to 98.74 on March 2. The US dollar “debasement trade” has been forgotten in favour of a safe harbour after the latest Middle East war.
That war and the risk of another inflationary spike, combined with the strength of recent economic data, including higher inflation readings, solidifies the Fed’s case to leave rates unchanged for longer. The January FOMC minutes, released February 18, confirmed that "some participants" supported holding the policy rate steady "for some time," while "several" others said they could have backed language in the post-meeting statement leaving open the possibility of a rate hike if inflation remained sticky.
In short, by the end of February, the "hold" camp had grown to encompass the majority of public Fed commentary, even drawing in some officials who had previously leaned dovish.
The Canadian Dollar and Bank of Canada
The loonie enters March facing a genuine tug-of-war between competing forces. On one hand, a sharp oil price rally is traditionally a Canadian dollar positive, and the sentiment is enhanced by the 23.0% rise in gold (XAUUSD) year-to-date. On the other, the same geopolitical shock is driving safe-haven flows into the U.S. dollar and roiling global risk appetite. USDCAD traded choppily in a 1.3515-1.3715 range during the month.
Bank of Canada Governor Tiff Macklem is navigating between slowing domestic demand and the possibility of an oil-driven inflation shock from abroad. The BoC monetary policy meeting is March 18.
Oil Prices
February ended and March began with the single largest oil market shock since Russia's invasion of Ukraine. WTI was trading around $72.79 per barrel early on March 2, up over 8.6% from roughly $67 on Friday. The catalyst is the effective closure of the Strait of Hormuz, which jeopardizes 20 million barrels per day of crude shipments. The duration of the supply disruption is unknown, although Trump announced that the US campaign in Iran will last at least 4-5 weeks.
There is no shortage of forecasts calling for WTI over $100 per barrel if the Strait is blocked for any length of time. However, it is not all bad news. In December, the Energy Information Administration, the International Energy Agency, and OPEC were suggesting that the world was awash in oil and would be for the first half of 2026, which may slow oil price gains in the short term.
Bank 2026-USD/CAD Q2 2026-USD/CAD Q3
Scotiabank* 1.3500 1.3500
BMO 1.3500 1.3600
CIBC 1.3700 1.3700
TD Bank* 1.3500 1.3700
National Bank 1.3500 1.3700
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
