By Michael O’Neill
The Loonie finished the first half of the year a little worse for wear, losing around 3.5% against the greenback. It could have been a lot worse.
The first half of 2026 was supposed to be a disaster for financial markets. Trade wars were expected to crush global growth. Conflict in the Middle East delivered a fresh inflation shock just as investors thought the battle against rising prices was finally being won. Every presidential press conference became a potential market-moving event, while speculation about Federal Reserve independence added another layer of uncertainty.
None of it happened quite the way analysts expected.
Markets adapted. Traders learned to fade the latest bout of White House outrage, equities climbed relentlessly higher and the U.S. dollar quietly posted respectable gains. USDCAD began the year closing at 1.3747 on January 5 and then finished the first half at 1.4197. The Canadian dollar’s 3.4% loss was the largest of the G-10 currencies although the Australian dollar’s 3.34% loss was a close second.
The Game is Afoot
The Canadian dollar started the second half with what World Cup fans would have described as a “Worldie,” if it hadn’t been telegraphed widely and often, prior to the announcement. Surprising no one the Office of the United States Trade Repetitive (always repeating themselves) released a statement saying, “The United States did not agree to renew the USMCA in its current form.”
Canadian dollar traders reacted with a collective yawn.
Trump is at his bullying, blustering best and repeatedly telling one and all that America doesn’t need anything Canada has.
That sound bite plays well with the orange-haired crowd, but the rest know different.
The U.S. depends on Canada for about 90% of its imported potash, a key ingredient in fertilizer that keeps American farms productive. Without it, America may no longer have a need for Ozempic. And that just scratches the surface.
It buys more than 60% of its imported crude oil from Canada, and many refineries across the Midwest and Gulf Coast were purpose-built to process Canada’s heavy crude. They can’t simply flip a switch and refine the lighter shale oil pumped out of Texas.
About one-quarter of the uranium fueling U.S. nuclear reactors also comes from Canada, while Canadian hydroelectricity flows south across an extensive network of transmission lines that helps keep the lights on in northern border states during periods of peak demand and extreme weather.
The dependence runs even deeper. Canada supplies nearly one-quarter of the aluminum used by U.S. automakers and aerospace manufacturers, half of its refined zinc, and is a major source of nickel, cobalt, tellurium and niobium, the critical minerals needed for everything from electric vehicle batteries and solar panels to fighter jets and advanced weapons systems.
Then there’s lumber. Despite decades of tariff disputes and political grandstanding, the U.S. housing industry still relies heavily on Canadian softwood to meet demand. Washington can huff and puff about going it alone, but geography, economics and decades of integrated supply chains have created a relationship that can’t be untangled easily or painlessly.
That may be nothing to Trump, but he’s betting on an inside straight. The last time he gambled on a Strait, Iran took him to the cleaners.
The Brick Wall
Canadians may like their chances as the trade negotiations resume, but if this were a World Cup match, they would be staring down The Brick Wall. The United States remains the world’s largest economy and Canada’s indispensable customer. Three-quarters of Canadian exports head south, giving Washington enormous leverage whenever trade disputes flare. If the border slows or tariffs rise, Canadian businesses feel the pain long before American consumers notice.
America’s dominance extends well beyond market size. Canada relies heavily on U.S. technology, cloud computing, software, pharmaceuticals and advanced manufacturing. Every winter, American farms help fill Canadian grocery shelves, while U.S. companies supply many of the medicines, medical equipment and technologies Canadians depend on. Canada may possess an abundance of natural resources, but turning those resources into high-value products often requires American capital, innovation and consumers.
The relationship is deeply integrated, but if the match goes into injury time, the United States has the deeper bench, the bigger budget and more staying power.
Penalty Kicks
All of this should keep an undercurrent of negativity beneath the Canadian dollar. Trade uncertainty, tariff threats and the reality that Canada has more to lose from a prolonged economic standoff than the United States are unlikely to encourage sustained loonie buying.
That said, the bigger driver for the next major move in USDCAD may not come from the CUSMA talks at all. It will hinge on whatever new inflation yardstick Fed Chair-designate Kevin Warsh decides to embrace.
If markets are forced to recalibrate their expectations for U.S. interest rates because the Fed changes the way it measures inflation, trade headlines could quickly become background noise.
July 1 ushered in the Round of Six for the Loonie. Whether it advances or gets knocked out will depend less on CUSMA and more on Kevin Warsh’s inflation playbook.
