By Michael O’Neill

The Canadian dollar does not trade in a vacuum, and its traditional North-South dynamic is rupturing. It is now in a three-way tug of war against Bank of Canada inertia, tariffs and trade deals, and a potentially politically compromised Federal Reserve.

Everyone of those themes finds a way to leave a mark on the Loonie as they push and pull in ever-changing directions.

Bank of Canada Sidelined

Bank of Canada monetary policy and forward guidance are the top factors that drive Canadian dollar movements. Not anymore.

The BoC Summary of Deliberations, released February 11, made that clear. “With uncertainty heightened, the range of possible outcomes that could materially change the outlook had broadened. Moreover, in the context of an unpredictable environment with little historical precedent, it was unusually difficult to effectively assign weights and probabilities to the various risks surrounding the outlook.”

In layman’s terms, it means “We don’t have a clue.” Policymakers believe that even with the benchmark rate at 2.25%, rates are still on the stimulative side. They noted that inflation is within its 1–3% band and that there is “little evidence of capacity constraints or labour shortages.”

Since the BoC has been relegated to cheerleader status, markets have little interest in Canadian economic data as a trigger for USDCAD moves.

CUSMA FUBAR

“If it works, break it.” That appears to be the “modus operandi” for Trump. The Canada-US-Mexico Agreement on Trade serves as the backbone of North American stability, supporting over 10 million American jobs by integrating regional supply chains. Mexico and Canada are now the first- and second-largest export markets for American farmers. It also gives American tech firms duty-free access for e-books, software, music, etc.

When the deal was signed, Trump called it “the most modern, up-to-date, and balanced trade agreement in the history of our country, with the most advanced protections for workers ever developed.”

Last week, Trump was reported to be thinking about dropping out of the deal, and he has until July 1 to either renew it or give six months’ notice to walk away.

That uncertainty has tainted the Loonie.

Independence Under Siege

Trump wants lower US interest rates, and he has been extremely vocal about it. His problem is he doesn’t have any control over US monetary policy or Fed Chair Jerome Powell. His displeasure went beyond tweeting insults and name-calling to ordering the Justice Department to subpoena the Federal Reserve, threatening criminal indictments for renovation cost overruns. Powell responded with a statement that said, “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure or intimidation.”

Trump has hinted that he would stop the legal proceedings. A key reason is because Senator Thom Tillis, a Republican who sits on the Finance Committee, threatened to block Kevin Warsh’s nomination for Fed Chair until Powell’s legal issues were resolved.

 In an interview on Sunday, Mr. Tillis said, “I’ve tried to make it very clear that I have no intention of supporting any confirmation of any Fed board member, chair or otherwise … until this is resolved.”

Trump’s actions have raised eyebrows and concerns around the world. The Fed’s independence is the foundation of the greenback’s reserve status, and it has that status because global capital believes US monetary policy is driven by inflation and growth, not politics.

Those fears have given rise to “dollar debasement” speculation, raised global risk aversion, and the Loonie is collateral damage.

War and Peace

Geopolitical tensions are another source of Canadian dollar angst, and, in February 2026, there are no shortages of them. Depending on your news feed, the US is on the verge of launching a full-scale attack on Iran, or its two carrier strike groups in the Arabian Sea are just a negotiating tactic. The Russia-Ukraine war may be ending if Ukraine gives in to US demands and cedes to Russia all the Ukrainian territory it wants but hasn’t captured. China’s ambitions toward Taiwan are always a concern, as are US foreign policy moves laying claim to the Western Hemisphere.

Loonie Undeterred

USDCAD has shrugged off the drama from tariffs, trade wars, and a tame Bank of Canada. Its medium-term downtrend remains intact while it trades below the 100-day moving average (1.3868) and the 200-day moving average (1.3814). Many analysts expect USDCAD to retreat throughout 2026 because of dovish prospects for Fed monetary policy while the BoC remains sidelined.

The losses will not be a one-way street, and prices are likely to trade choppily in a 1.3500–1.3850 range until the Fed monetary policy meeting on March 18.

The three-way tug of war leaves lots of opportunity for the Loonie to land beak first in the mud.