Both the Federal Government and the BoC have stressed the need for Canada to commit to a restructuring of the domestic economy to reflect the new geo-political trade picture. And they have attempted to keep the focus at the macro level and on the development and completion of major infrastructure projects. A key consideration in this space is the fact that persistent inflation is always one of the biggest external threats to the launch and financing of such key infrastructure projects, the kind of which would support Canada's return to a 2.5% to 3.0% growth trajectory. If a comprehensive macro-level retooling of the Canadian economy is the ultimate goal, managing these rising and unanchored inflationary pressures may take priority over addressing sluggish growth.

The ongoing CUSMA background noise is now put to bed for 2026, but one of the consequences of the results of the renegotiations is the probable creation of recurring annual friction. Might this continue to cause firms to hesitate? Or may they be forced to become comfortable executing investment intentions within this ‘new normal’? Improved sentiment in central bank business outlook surveys suggest the latter. The reality will play a large part in influencing future growth.

We anticipate a flattening of the U.S. yield curve as Kevin Warsh's Fed makes credibility the number one consideration. Canada will likely track this trajectory despite lacking independent domestic triggers. While high national deficits require central banks to intensely protect their bond market credibility and ‘hold in’ the curve via rate policy, Canada has recently benefited from tight credit spreads and robust foreign interest for Canadian-denominated debt and we expect this to continue.

Early-year USD weakness vanished in March, as an aggressive U.S. dollar rebound was triggered by the conflict in the Middle East, prompting immediate concerns over global crude accessibility and rising inflation. Responding to weak Canadian economic data, divergence in Canada-U.S. interest rate spreads, and the shift towards a hawkish Fed, USD/CAD broke through the 1.3700 level, and traded to a high of 1.4248 in late June/early July.

For corporate hedgers, negative forward points driven by widening interest rate spreads have rendered longer-dated protection expensive and less appealing to commercial USD sellers, despite higher spot rates. However, Canada has experienced improved short-term capital flows during the first half of 2026, and we continue to see a supportive environment on this front into the second half of the year. Institutional and corporate USD/CAD selling accelerated significantly once the pair crossed the 1.4100 level, led by active participation from the energy and metals sectors.

The conflict in the Middle East delivered a massive shock to the physical oil market in the first half of the year, disrupting up to 15 million barrels per day (bpd) as key transit routes in the Strait of Hormuz closed. While Saudi Arabia’s East-West Crude Oil Pipeline partially mitigated the impact, conflicting rhetoric from the U.S. administration regarding the conflict’s duration versus what has actually transpired has caused low predictability to persist, leaving, by some estimates, 70 million barrels of crude supply waiting to exit the Persian Gulf as of late June.

Financial markets, with reasoning based on the quick resolution we saw of the previous conflicts in the last 18 months, mispriced the potential duration of the current conflict and the severity of the Iranian reaction, not to mention their ability to absorb physical damage without changing ideology or course. Early in the current conflict, buyers who were short contracted deliveries were at times forced to pay upwards of $175/bbl for Brent cargoes. Brent futures meanwhile, topped out around $120/bbl, a $55 discount for an implied 4-8 week delivery delay.

Domestically, limited egress pipeline capacity kept Western Canadian Select (WCS) at a $14 to $15 discount to West Texas Intermediate (WTI). Meanwhile, Alberta natural gas was treated as a discounted byproduct as many producers drill for high-value liquids-rich gas, pushing new associated dry gas into an already fully supplied market.

Looking to the remainder of 2026, the heavy inventory depletion of 500 to 900 million barrels of crude has created a need for strategic and commercial replenishment, establishing a potential structural price floor near $60 for WTI. Historically low inventories at the Cushing storage hub and the U.S. Strategic Petroleum Reserve will require a narrowing WTI-Brent spread to incentivize the retention of domestically produced barrels and the import of barrels for storage replenishment. 

Once the conflict in the Middle East eases, there is the potential to revert to previous prevailing supply-and-demand balances (with roughly 2 to 3 million bpd of excess capacity), allowing global storage facilities to refill more economically over an 18-month period than implied by crisis oil prices of the last 4 months. A reversion to normal-course hedging by producers, using dollar-cost averaging techniques, will allow predictable revenue forecasting at levels better than those prevailing pre-crisis.

A pronounced disconnect persists in Alberta’s environmental market, where prices for carbon credits in the Province’s Technology Innovation and Emissions Reduction (TIER) program languish in the $30 to $35 per tonne range, despite the fact that the 2026 compliance price is $95 per tonne.

This suppressed pricing is driven by a massive ~40 million-tonne surplus in carbon credit inventory. This overhang was largely generated in the 2020-2023 time period, both by methane abatement activities in the oil and gas sector and the growth of renewable electricity generation. Since then, credit generation has been roughly equal to retirements, leaving the overhang largely in place. Changes in regulatory requirements in 2025 also reduced net credit demand. Small emitters who are below compliance benchmarks have been permitted to remain in the TIER market to generate and sell Emission Performance Credits (EPCs) while those above benchmark have been allowed to opt-out, sustaining supply while reducing market demand.