Why an additional 5% increase in the Canadian dollar in 2026 might already be a certainty

Investors monitoring the USD/CAD pair are paying too much attention to tariff-related risks, ignoring the significantly stronger fundamentals of the Canadian economy. Analysis shows that the market has already priced in pessimistic scenarios, while the reality turns out to be much more promising.

The market signals clearly: consumers have not given up

The biggest surprise of last year was the resilience of Canadian consumers. Despite a dramatic drop in housing prices—another 6% decrease in Toronto—household spending remained stable. This is a key signal: housing price charts show a collapse in property values, but actual consumer behavior indicates adaptability.

The banking sector passed the test on the first try. When, mid-year, financial news readers expected a consumption crash, the TSX index instead posted solid gains. Canadian banks, sensitive to credit condition changes, demonstrated rising share prices. This indicates that predictions of a housing market collapse were exaggerated.

Demographic reflection in spending

The phenomenon was that the older generation (baby boomers) did not reduce consumption despite declining asset values. This is natural for a age group that no longer plans to sell property—it is their residence, not an investment. The consequence? Canada entered 2026 with an unexpectedly diversified economic growth base.

Tariff scenarios: a game of who loses less

The Supreme Court ruling on the legality of US tariffs on Canadian goods will be announced by the end of June, although a faster process suggests a result this month or in February. The decision will matter not just because of the tariffs themselves but because of the signal it sends to markets.

Optimistic scenario: if Trump loses significant authority to impose tariffs, we will witness a massive influx of capital into risky assets, commodities, and emerging currencies. Gold will fall, and the Canadian dollar will gain. The market prices this as more likely.

Pessimistic scenario: if the Supreme Court is perceived as a “stamp” for all administration decisions, capital will start leaving the US. The gold and precious metals rally will become reality. Neither scenario is good for the dollar, but the first is more realistic.

USMCA: talks that are not at all conflictual

The confusion around tariffs overshadowed the key December message: USTR chief signaled support for a trilateral agreement. It was not a spectacular announcement—it went almost unnoticed—but it was significant.

The misunderstanding concerns the mechanics. If the US triggers the sunset clause in July (Article 34.7), it does not mean the end of the agreement. This instrument undergoes annual reviews without halting trade. Each country has a separate right to withdraw with six months’ notice, but Trump did not exercise it earlier, despite having the opportunity.

The dairy sector—the main point of contention—is a marginal part of the Canadian economy. Even the most pessimistic scenarios regarding steel and aluminum do not threaten growth. A potential “North America fortress” strategy would be a net benefit for Canada, as it would block Chinese imports.

Commodities: something is changing in the fundamentals

2025 will be remembered in commodity history as a breakthrough. Global growth has stabilized, interest rates are falling, and investors are once again looking at long-term prospects.

Oil is an exception—outlook for 2026 is skeptical, but experts indicate that this could be the year we hit bottom. US production has stabilized, and supply deficits in the oil market may only appear in two years. Canadian oil company stocks (CNQ.TO) are valued higher than ever before at similar oil prices—this reflects growing confidence in the long-term value of oil sands.

Carney’s government changes the political game

The transition from Stephen Guilbeault’s government is a signal: Canada is opening up to resource sector development. It will not be an overnight change, but the ongoing political outlook indicates that regardless of whether liberals remain in power or conservatives return, resources will be a priority. Few G10 countries offer such political certainty.

In 2025, the Canadian dollar appreciated about 5%, placing it in the middle of the advanced economies currency standings. This is an undervaluation of the political changes that occurred last year.

No more ultra-low interest rates just around the corner

Ultra-low rates from 2021 are gradually ending. The challenge for consumers is real, but there is light on the horizon. The Bank of Canada is priced by the market with about a 65% chance of raising rates by the end of this year.

If consumers maintain their strength through the first half of the year—which is increasingly likely—the bank will have justification for hikes. Higher interest rates are a direct catalyst for the appreciation of the Canadian dollar against lower-rate currencies.

Final forecast: USD/CAD at 1.3070

The combination of fundamentals suggests another 5% rise in the Canadian dollar in 2026. This implies a USD/CAD pair at 1.3070 or CAD/USD at 76.5 cents.

The path may be volatile. Delayed tariff decisions by Trump will generate volatility swings, and USMCA negotiations will sometimes be loud. But for long-term investors, these shocks will be buying opportunities, not selling. Canada enters the year with better political prospects, solid commodity fundamentals, and a surprisingly resilient consumer base—that’s a combination the market underestimates.