EU Midday Digest - 25 May 2026

Canadian dollar pressure intensifies as foreign inflows dip to C$4.6 bn and the Bank of Canada holds rates at 2.25 %.

Overnight & European Session

Asian markets opened lower on fresh oil‑price anxiety after Bloomberg reported a 3 % drop in Brent to US$100.21, while European equities rallied, with the Euro Stoxx up 1.51 % and the Nikkei gaining 2.87 % on the back of a stronger commodity outlook. The euro appreciated to 1.1646 against the U.S. dollar (+0.21 %) as the DXY slipped to 99 (‑0.33 %). In North America, the U.S. 2‑year Treasury yield edged higher to 3.59 % (+0.08 %) and the 10‑year fell to 4.56 % (‑0.61 %), keeping the yield curve relatively flat. The divergence between the Asian sell‑off on oil and the European risk‑on bounce reflects contrasting reactions to the same commodity move: Asian exporters see margin pressure, whereas European investors focus on the upside from a weaker dollar and stable inflation expectations. Currency markets remain calm overall, with the Canadian dollar hovering near its recent narrow range despite the latest Statistics Canada data on capital flows.

Key Themes Today

• Canada Rates: The Bank of Canada left its policy rate unchanged at 2.25 % (target for the overnight rate) and kept the Bank Rate at 2.5 % and the deposit rate at 2.20 % (Bank of Canada press release). The central bank cited a “cautious approach” that balances inflation control with growth, noting that the economy is operating close to potential and inflation remains within the 2 % target band. At the same time, Statistics Canada reported that foreign investors bought only C$4.6 bn of Canadian securities in March – the lowest monthly inflow since the start of 2026 – while domestic investors purchased just C$3.9 bn of foreign securities, far below the four‑month average of C$16.7 bn. The widening net flow gap (C$0.7 bn) suggests limited foreign capital support, which could keep the CAD under pressure and limit upside for Canadian equities. Fixed‑income managers may therefore favour Canadian government bonds, where yields are likely to stay low given the policy stance, while equity investors should watch for a possible CAD depreciation if the flow imbalance persists (Bank of Canada; Statistics Canada).
• Canada Trade & Inflation: Statistics Canada’s March 2026 trade data showed an 8.5 % jump in merchandise exports and a 1.6 % decline in imports, flipping the current‑account balance from a C$5.1 bn deficit in February to a C$1.8 bn surplus – the first surplus since September 2025. However, the services balance swung to a C$0.1 bn deficit, highlighting a vulnerability in export‑oriented services such as tourism and education. On the price side, the Industrial Product Price Index rose 2.0 % month‑over‑month and 11.4 % year‑over‑year in April, while the Raw Materials Price Index surged 2.6 % month‑over‑month and 31.6 % year‑over‑year. The Consumer Price Index increased 2.8 % year‑over‑year, up from 2.4 % in March. These broad‑based price pressures reinforce the Bank of Canada’s focus on price stability and suggest that inflation could remain sticky, especially in the industrial sector. Investors may therefore tilt toward defensive Canadian assets – high‑quality dividend stocks and sovereign bonds – while monitoring the trade surplus for signs of sustained export strength (Statistics Canada).
• Australian Dollar Liquidity: The Reserve Bank of Australia’s Project Acacia pilot demonstrated atomic settlement of tokenised debt securities in under 2 seconds, compared with the traditional T+2 settlement for AUD‑denominated bonds (RBA/DFCRC report). HIMCo’s 2025 cost‑benefit study estimated that a CBDC‑backed tokenised repo market could shave 18‑22 bps off daily turnover liquidity buffers. The RBA notes that such efficiency gains could compress the 3‑month BBSW by 5‑7 bps if a wholesale CBDC pilot is announced for 2027. This potential tightening of short‑end rates would benefit AUD‑denominated money‑market funds and short‑duration bond ETFs, which could outperform the cash rate by 10‑15 bps (RBA media releases). Market participants should therefore watch for any RBA signalling of a tokenisation roadmap, as it may re‑price AUD repo and swap markets ahead of the next policy decision.
• Middle‑East Energy Shock: RBA Governor Sarah Hunter warned that the conflict in the Middle East has lifted Brent crude by 25 % since the war began, while shipping costs are up 15 % (RBA speeches). The same speech highlighted a 5 % depreciation of the Australian dollar against the U.S. dollar since the conflict’s onset. These dynamics suggest that the RBA may need to maintain a tighter monetary stance for longer than previously anticipated, despite its overall policy‑rate neutrality. Bloomberg’s coverage of oil price volatility reinforces this view, noting that oil’s recent 3 % decline to US$100.21 still leaves the market vulnerable to further spikes. Investors should therefore anticipate continued AUD volatility and possible upward pressure on Australian yields if inflationary pressures from higher energy costs persist (RBA; Bloomberg).
• U.S. Fed Hawkish Shift: InvestingLive reported that the latest FOMC minutes dropped “nimble” language and signalled a “hold‑or‑tighten” stance, with three members dissenting to remove the easing bias. The minutes indicate that market expectations for three 25‑basis‑point cuts in 2026 have been “unwound almost entirely,” implying a higher terminal rate and a steeper 2026 yield curve. This dovetails with the market snapshot showing the U.S. 2‑year Treasury at 3.59 % and the 10‑year at 4.56 %, while the VIX eased to 16.65 %. The combination of a hawkish Fed and a still‑elevated VIX suggests that fixed‑income investors should brace for higher rates and that equity markets may see a modest pull‑back as risk‑premia adjust (InvestingLive).

What to Watch

Key intraday catalysts include the release of Statistics Canada’s monthly credit‑aggregate data on May 25, which will provide the first near‑term gauge of Canadian credit conditions and could confirm whether credit growth is slowing, reinforcing the Bank of Canada’s dovish bias. In Australia, the RBA’s upcoming monetary‑policy statement (due later this week) will be closely read for any mention of tokenised settlement or wholesale CBDC pilots; a hint of tighter liquidity could trigger a 5‑7 bps move in the 3‑month BBSW. U.S. investors will watch the Fed’s next press conference for any clarification on the “hold‑or‑tighten” narrative; a firm commitment to higher rates would likely push the 10‑year yield above 4.60 % and pressure risk assets. European markets should monitor the Eurozone CPI release (expected later today) for any surprise in the headline 4.2 % figure cited by BIS; a higher reading could lift the euro and support the Euro Stoxx further. Finally, the oil market remains a wildcard – a rebound in Brent above US$105 could reignite concerns about inflationary spillovers into the RBA’s policy outlook. The open question: will the RBA’s tokenisation agenda accelerate, and how will that reshape AUD short‑end rates?