Economic Outlook and Summary
March began with a bang—literally (if you were in Iran). The US military action dubbed Operation Epic Fury was an attack on Iran and an economic assault on the world. That’s because the brain trust in the American war room failed to account for Iran’s ability to close the Strait of Hormuz. Around 15 million barrels of crude transited the Strait daily before the American attack. Today, very little is getting through.
Oil and gold prices surged, 10-year government bond yields climbed, and the US dollar rallied across the board due to safe-haven demand.
The S&P 500 dropped from 6878.88 at the February close to 6528.52 at the end of March.
The Middle East conflict was another reason for central bank decisions to leave interest rates unchanged, as they were still dealing with the impact of Trump’s tariffs. The only outlier was the Reserve Bank of Australia, which hiked its benchmark rate to 4.10% and justified the move due to “inflation picking up materially.”
The US and Israel’s war on Iran dictated market direction all month and will continue to do so in April. The Americans appear to be setting the stage for a ground assault due to the massive buildup of military assets in the region and aggressive rhetoric from Trump and the Secretary of Defense.
The USD and Federal Reserve
The US dollar surged against the majors. The US dollar index rose 1.9% peak to trough and is beginning April near the top of that band. The greenback has reasserted itself as the currency safe haven of choice and, as long as the Iran war rages, will likely remain bid.
The Fed held rates unchanged. The dot plot pointed to one cut in 2026 and one in 2027, though seven participants now expect no cuts this year. That’s one more than projected in December. Powell said it was "too soon to know" the impact of the war, while acknowledging that near-term inflation expectations had risen due to the oil price surge. Core PCE projections were revised up to 2.7% for 2026 (from 2.5%), and 14 participants now see one or no cuts this year versus eleven in December. Governor Miran was the sole dissenter, favouring a 25 bp cut.
The Fed Chair reaffirmed the cautious “wait-and-see” stance in a speech at the end of March.
The Bureau of Labor Statistics reported that nonfarm payrolls rose 178,000 in March, far exceeding the 70,000 consensus estimate and fully reversing the 92,000 jobs lost in February. The results will quickly be forgotten, as FX traders will be focused on developments in the Iran war.
The Canadian Dollar and Bank of Canada
As of April 3, the Canadian dollar has fallen 1.94% since Operation Epic Fury began. Oil has done the heavy lifting, with Canada’s crude reserves acting as a buffer. The Bank of Canada is effectively sidelined by uncertainty, which it more or less confirmed when it left rates unchanged at 2.5% on March 18. The BoC’s monetary policy stance contributed to the widening of CAD/US interest rate differentials, which was exacerbated by rising Treasury yields. The Loonie’s direction in April will be dictated by sound bites and headlines about the US and Iran war.
Oil Prices
Surging oil prices have dictated price action in stocks, bonds, other commodities, and FX. WTI soared 67% in the wake of Operation Epic Fury. Prices eased from 116.63 on March 8 to 86.85 on March 25 on optimism after Trump suggested that the war would be over soon. He changed his tune a couple of days later, and WTI is sitting above 112.00 on April 3. The Strait of Hormuz has been effectively closed for 34 days, and the effects of that closure are being felt across the globe. The short-term outlook is for WTI to remain above 80.00/b.
Bank 2026-USD/CAD Q2 2026-USD/CAD Q3
Scotiabank* 1.3500 1.3400
BMO 1.3600 1.3500
CIBC 1.3700 1.3500
TD Bank* 1.3600 1.3500
National Bank 1.3500 1.3300
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
