By Michael O’Neill

What a year 2025 turned out to be.  It has been a long time since one man was able to disrupt the established world order by the sheer weight of his personality and with an ego that knows no bounds. The election of Donald Trump as the 47^th President of the United States was as much a global economic virus as the global COVID-19 pandemic.  Both wreaked havoc around the globe except COVID had the promise of a vaccine.

Mostly Bark, Little Bite

Trump’s tariff war on Canada was nasty for the aluminum, steel, and lumber industries, but for the rest of Canada, not as much. Prime Minister Mark Carney said as much when he pointed out that around 90% of all Canadian exports were exempt under the United States-Mexico-Canada Agreement (CUSMA) on trade. That meant Canada had one of the lowest effective tariff levels of any country. Still, the other tariffs left a mark.

Trump may not have blown up CUSMA but he turned it into a conditional ceasefire. Canadian firms learned that compliance no longer guaranteed stability, only temporary mercy. That agreement is up for review and, in a worst-case scenario, could be scrapped in July 2026.

Loonie Non-plussed

The Loonie had nothing but disdain for Trump’s tariffs. After peaking at 1.4791 the day Trump declared that Canada was a national security threat for the massive exports of fentanyl it sent into America, the loonie has gained 6.9% as of today.

Trump may be president, but Fed Chair Jerome Powell controls monetary policy, much to Trump’s chagrin. The president began a campaign of insults and threats of lawsuits to force Mr. Powell to cut interest rates, but Powell and most of the FOMC committee just ignored him. The Fed kept rates elevated largely because of the unknown impact that tariffs would have on inflation. After all, it was American importers that paid the levy, not foreign exporters. Nevertheless, analysts expected that the Fed would have to cut interest rates due to job market deterioration, and traders sold US dollars.

The Fed has trimmed rates by 75 bps to 3.75%, with the latest cut occurring December 10. The CAD/US interest rate differential narrowed sharply since hitting -155.3 in February, reaching -74.7 today, which eroded a key advantage that had underpinned USDCAD.

Elbows Up in 2026

Mark Carney’s “elbows up” campaign slogan is an apt metaphor for Canada and the Loonie in 2026. It’s going to be rough, but Canada will not go meekly into the setting sun.

The broad consensus heading into 2026 is uninspiring but realistic. Canada is looking at another year of modest growth as the economy continues to absorb the aftershocks of the U.S.-led trade disruption. Most credible forecasts cluster around 1% growth, slightly softer than 2025, as trade uncertainty and cautious corporate behaviour continue to weigh on activity.

Canada got some good news last week after the country posted a trade surplus of $153 million in September. Some economists suggested that the report was evidence that trade was starting to normalize. Don’t bet on it. Canada relies on US data for Canadian exports to that country, and because of the American government shutdown, the quality of American data that was received is questionable.

Business investment remains hesitant, even though fiscal support from the Carney budget may provide a bit of a backstop. The underlying issue is that growth is slow because confidence is fragile and capacity has been dented.

The Bank of Canada’s October 2025 projections quietly reinforced that message. After incorporating historical revisions, the level of GDP by the end of 2026 is now expected to be materially lower than previously assumed. Growth in both 2025 and 2026 was marked down sharply from earlier forecasts. But the BoC is not driving the bus on Canadian dollar direction.

Fed in Control

The Fed and its monetary policy outlook is the number one factor that will determine if USDCAD rises or falls. The December 10 dot-plot projections suggest two further 25 bp rate cuts in 2026.

December projections point to core PCE inflation around 2.5 % in 2026, slightly above target and consistent with only modest slack in the labour market, and the November and October nonfarm payrolls reports, released December 16, did not change that outlook.

That’s because these reports were derived from incomplete surveys with unusually low response rates and elevated standard errors. If the Bureau of Labor Statistics (BLS) thinks the data is dodgy, then the results are rather useless.

The risk that the USDCAD post-Trump inauguration slide continues in 2026 is offset by the risk that Trump escalates his trade vendetta with Canada, which suggests what was may still be.

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