- USD/CAD is stuck in a range as firm U.S. data supports USD while Canadas inflation and growth remain steady enough to limit CAD downside.
- Trumps claim that USMCA is irrelevant has heightened trade-policy risk for Canada and increased pressure to reduce reliance on the U.S. market.
- Canadas outreach to China is a diversification effort, offering limited but useful tariff and trade openings that cannot replace the U.S. as the dominant customer.
- The BoC is paused at 2.25% near neutral while sticky inflation and hotter U.S. wholesale prices keep the Fed cautious, biasing USD/CAD toward the top of recent ranges.
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The Canadian dollar’s muted response overnight reflects a balance: stronger U.S. inflation indicators and retail sales keep the U.S. dollar supported; meanwhile, Canadian inflation and growth data remain credible enough to prevent a sharp CAD decline. Key drivers include trade policy uncertainty, where Trump’s dismissal of USMCA—even ahead of its 2026 review—has elevated downside risks for Canada’s trade flows. Canada’s negotiating posture now includes possible alignment of certain tariff exemptions with U.S. policy, and a clear move toward reducing dependency on U.S. demand.
The recent diplomatic reset with China—Mark Carney’s state visit in mid-January—is a strategic response to these pressures. Canada reached preliminary agreements to lower major tariffs (e.g. Chinese EVs from 100% to an estimated 6.1%; Chinese tariffs on Canadian canola being cut steeply) and to deepen cooperation in clean energy, agriculture, finance amidst recognition that U.S. market stress requires diversification,. These trade shifts are not large enough to substitute the U.S. as Canada’s dominant market but provide optionality in a volatile policy environment.
On monetary policy, the BoC has signaled it is done with rate cuts—holding the overnight rate at 2.25%, its estimate of the lower neutral bound. Inflation has remained close to 2%, with trimmed mean inflation around 2.8% in late 2025 and easing slightly; core price pressures, especially in shelter and imported goods, remain sticky,. RBC Economics sees inflation tracking close to target, but warns upward risks are skewed if consumer demand remains resilient or costs from trade reconfiguration intensify.
In the U.S., wholesale inflation (PPI), the fallout from data delays due to government shutdowns, and stronger retail sales have weakened the case for imminent Fed rate cuts. PPI reports showed a 0.2 % monthly rise and core PPI climbing to 3.5% annualized—the highest in months—suggesting inflation remains persistent. Traders are now pricing in a more hawkish U.S. stance, which supports USD and exerts pressure on CAD, especially given the intertwined nature of trade, where many inputs cross the border.
Strategic implications: USD/CAD may gravitate toward the top end of recent ranges absent a strong positive surprise from Canada—likely near 1.38–1.40—if U.S. data stays robust. Canadian exporters face ongoing cost risks from U.S. tariffs and supply chain friction, and sectors such as autos, agriculture, and energy are under particular threat. For policy makers, maintaining inflation expectations anchored and mitigating trade risk through diversification are critical. Open questions include how aggressively the BoC will respond if inflation overruns, whether the U.S. Fed’s stance will firm further, and how meaningful Canada’s China pivot will prove in substituting for lost U.S. market confidence.
Supporting Notes
- President Trump said USMCA is “irrelevant to the US” during a visit to Detroit, calling it unnecessary and suggesting U.S. firms could do without Canadian and Mexican supply chains.
- Canada and the U.S. launched formal talks in mid-January to review USMCA ahead of its 2026 review, led by Dominic LeBlanc.
- During his China visit, Prime Minister Carney reached preliminary tariff concession agreements including reducing Chinese EV import tariffs and opening trade in clean energy, agriculture and finance, part of a broader strategy to reduce reliance on the U.S. market.
- The Bank of Canada holds its key overnight rate at 2.25%, viewed as the bottom of its neutral range; core inflation (CPI-trim/median) remains near 2.8% in late 2025.
- RBC Economics expects no further rate cuts in 2026 and judges risks for inflation are tilted upward, with potential for rate hikes in the latter half of the year.
- U.S. wholesale prices rose 0.2% in November with core PPI up 3.5%, the strongest nine-month core wholesale inflation rate in recent memory—putting pressure on the Fed to delay cuts.