There are two big events to watch for in 2026 that will swing the outlook for the loonie, including one that could be just days away:
1) Supreme Court decision on tariffs
The Supreme
Court has until late June to decide on the legality of US tariffs on Canada but
because this was an expedited hearing, we expect a decision this month or in February.
The decision itself is important, especially in terms of possible refunds but there
is a critical signaling mechanism here. The vote margin and the argument will
tell us about what will happen if Trump tries to put on tariffs in other ways,
which is something administration officials have said they will do. If it looks
like Trump will largely lose the power of tariffs then I’d expect a large
positive reaction in risk assets and anything global growth related, like
commodities. I would expect gold to decline.
On the flip
side, if tariffs are allowed to continue then it starts to look like the
Supreme Court is a rubber stamp for whatever Trump wants to do and you can use
your imagination around that but none of those outcomes are good for global
growth and I’d expect to see capital flight out of the US. It probably also
sets up another big rally in gold and precious metals in 2026.
There is
plenty of nuance and murky middle territory as I don’t expect either outcome to
be entirely straightforward but I expect the Supreme Court to defeat tariffs
and that should be good for the Canadian dollar as it tees up the second big question:
2) USMCA
Now on Dec
17-18, the USTR seemed to indicate that it would pursue staying in the
agreement and extending it but it would be contingent on changes.
This flew
under the radar because it was so close to year end but it was generally good
news. The US is going to lean on dairy concessions again but the vast majority
of the 1514 comments from stakeholders were supportive of the agreement.
Unfortunately,
the USTR decided to do most of the briefing behind closed doors but reports
from Senators in those hearings were positive.
Greer “came out with a very clear statement that they are
supportive of the three-nation agreement,” Republican Senator James Lankford
said. A WSJ report citing “over a dozen” lawmakers also noted that Greer didn’t
bring up exiting the agreement.
What’s
perhaps lost in all the tariff angst is that the US saying it intends to leave
and then triggering the sunset clause Article 34.7) in July doesn’t end the
deal. This mechanism is a review mechanism and it would simply kick off annual
reviews for the next decade rather than a 16 year extension. The agreement
would stay in force.
Now each country
has a separate mechanism to leave the agreement on six months notice at any
point (Artilce 34.6). Trump could have triggered this at any point and hasn’t.
Now maybe he goes nuclear and does that but why now?
The bottom
line here is that there is some uncertainty but the issues the US outlined aren’t
critical for the Canadian economy. Dairy is a small part of the economy and
even on steel, the concerns highlighted were on the Mexico side. Canada can
simply play the annual review game.
There is
upside here as well as many Senators are pushing for a ‘fortress North America’
strategy that mainly blocks China but could also target other foreign goods. If
that ends up being the case, it’s ultimately a boon for Canada as it would
affirm zero tariffs.
Ultimately,
as this process plays out, expect some intense bluster from Trump but I think
those are dips to buy. By year end 2026, we should be on the other side of this
and that will mean certainly plus a very likely drop in steel/aluminum tariffs
and maybe even lumber.
Now it will
take some courage but unless you’re in one of those industries or dairy, I
think you can tune out negotiations.
There are also three other things I think will drive the loonie this year:
1) Commodities
2025 was a
good year for commodities and 2026 should be the same. Rates are coming down
and global growth looks solid. There is some momentum here with oil as the big
exception. It doesn’t look great for oil this year but it should be the year we
find a bottom. US production has flatlined and the market has a pretty good
view into OPEC. We’re a couple years from potential oil market deficits, and
that’s without OPEC holding back barrels. I think the clearest view on that is
Canadian oil company stocks. They are much higher than they were in April or
any other point in the past few years when crude prices were around these levels.
I think that reflects a growing long-term belief that there’s value in the oil
sands.
2) Politics
Coupled
with that commodity outlook, Canada looks like a much better place to invest
than it did a year ago. The Carney government is trying to make it easier for
natural resources. There’s work to do but removing Stephen Guilbault from
cabinet is a sign of which way it’s heading. Moreover, commodity projects take
many years but if you look at the Canadian political landscape you can have a
lot of confidence that it will either be Carney’s Liberals or Conservatives in
charge. There aren’t many jurisdictions where you can find that sort of
certainty.
If you look
at 2025, the loonie gained about 5%.
That puts it in the middle of the pack of G10 currencies. I would argue that
underprices some of the positive political changes in the past year.
3) Housing
and Consumers
A big risk
I outlined last year was in Canadian housing and that unfolded about how I
expected. Toronto housing prices fell another 6% and 2026 isn’t looking any
better. The big question though was about how consumers would respond to the declining
wealth effect. What happened was that it was very limited. People saw their
housing equity decline but didn’t spend any less. A big part of that is that
few Canadians tapped the gain in housing equity since 2018. I think the
clearest sign that the market has moved past housing concerns is the
performance of bank stocks in 2025. Once the dynamic around consumers became
clearer at mid-year it turned into a big year for banks, and the TSX in
general.
This year
is a similar challenge because the ultra-low mortgage rates from 2021 are
rolling over but we can see the light at the end of that tunnel now and it’s
surprisingly good. I would say the biggest surprise of 2025 was the strength of
the Canadian consumer despite the uncertainty and I suspect a lot of that is
demographics and baby boomer spending but that’s certainly not all of it and
the picture has been good. If it holds up through mid-year, I think you could
see the Bank of Canada begin to talk about rate hikes and already the market is
pricing in about a 65% chance of a hike late this year.
Add it all up and I think you can get another 5% rally in the loonie in 2026. That USD/CAD at 1.3070 or CAD/USD at 76.5 cents.
This article was written by Adam Button at investinglive.com.