The loonie is a weird bird. Honestly, if you've spent any time staring at the Canadian dollar to US dollar exchange rate over the last few months, you know it feels less like a financial metric and more like a mood ring for the global economy. One day we’re talking about "parity" like it’s a distant dream, and the next, everyone is panic-buying greenbacks because of some headline about trade tariffs or a sudden shift in oil inventories.
It’s currently January 2026. The exchange rate is hovering around 0.72, give or take a few fractions. That puts the USD/CAD pair near 1.39. It's a range we’ve become begrudgingly comfortable with, but the underlying mechanics are shifting under our feet.
Most people think the exchange rate is just about who has the stronger economy. It’s not. Or at least, not entirely. It’s about the "spread"—that specific, often annoying gap between what the Bank of Canada (BoC) is doing and what the U.S. Federal Reserve is plotting in D.C.
The Interest Rate Tug-of-War
Right now, we are seeing a massive divergence that hasn't happened in nearly a decade. For years, the BoC and the Fed moved in lockstep. They were like siblings following the same chores list. Not anymore.
As of this week, the Federal Reserve has paused at a range of 3.5% to 3.75%. They gave us a 25-basis-point cut back in December, but Jerome Powell basically told everyone to cool their jets. He’s looking at "stubborn" core inflation that just won't sit down. Meanwhile, Tiff Macklem over at the Bank of Canada is dealing with a totally different beast: a Canadian economy that is essentially flatlining in terms of population growth.
RBC Economics recently pointed out something wild: Canada is looking at zero population growth in 2026. That is the first time that’s happened since the 1950s. When you stop adding people, you stop adding "easy" GDP growth. This puts the BoC in a corner. They want to keep rates at a "neutral" level—around 3.25% to 3.5%—but they can't afford to let the loonie drop too far, or they’ll just import inflation from the U.S.
If you’re holding CAD, the "yield advantage" is currently with the U.S. dollar. Investors want to park their cash where it earns the most interest. Right now, that’s south of the border. This "wedge," as the Bank of Canada calls it, is the primary reason the loonie is struggling to break past that 0.74 ceiling.
Why Oil Isn't the Only King Anymore
We used to call the Canadian dollar a "petro-currency." If oil went up, the loonie went up. Simple.
Lately, that relationship has been... complicated. Crude is sitting around $85 a barrel—a decent price. Normally, that would have the Canadian dollar screaming toward 0.78. But it’s stuck. Why? Because the market is terrified of the "T-word": Tariffs.
The 2025 trade skirmishes with the U.S. administration haven't fully healed. Even though Canada dodged the worst of the reciprocal taxes, the mere threat of a 25% tariff on Canadian exports acts like a lead weight on the currency. Scotiabank’s FX strategists have noted that the CAD is acting as a "shock absorber." Instead of the economy crashing, the currency just loses value. It makes our exports cheaper for Americans, which helps keep our factories running, but it sucks for anyone trying to take a vacation in Florida.
Real Numbers You Should Care About
Let’s look at the actual trajectory from the past year to see where this is heading.
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- January 2025: The loonie was struggling at 0.69.
- Summer 2025: We saw a brief rally to 0.73 as the Fed hinted at earlier cuts.
- Today (Jan 2026): We are stabilizing at 0.719.
National Bank has a target of 1.32 (which is 0.75 in loonie terms) by the end of 2026. That’s an optimistic view. It assumes the Fed will have to cut more aggressively than they’re letting on because of a slowing U.S. labor market. If the U.S. unemployment rate—currently creeping toward 4.6%—spikes, the Fed will slash rates, the USD will weaken, and the loonie will finally get its moment in the sun.
The "Hidden" Factors: Productivity and Housing
Here is what nobody talks about at dinner parties: Canada’s productivity is, frankly, terrible. We are falling behind the U.S. in terms of output per worker. When a country is less productive, its currency eventually reflects that lack of "value creation."
Then there’s the housing bubble—or whatever we’re calling it this week. Canadian households are some of the most indebted in the G7. If the BoC raises rates to protect the currency, they risk blowing up the mortgage market. If they lower rates to save homeowners, the loonie tanks. It’s a delicate balancing act that keeps currency traders awake at night.
What You Can Actually Do
If you're a business owner or someone with a lot of cross-border expenses, stop trying to "time" the bottom. You won't. Professional traders with Bloomberg terminals struggle to do it; you won't do it with a Google tab.
Instead, look at the 1.37 to 1.40 (USD/CAD) range as the "new normal" for the first half of 2026. If you see the rate dip toward 1.35 (which is about 0.74 CAD/USD), that is a gift. Buy your U.S. dollars then.
Actionable Steps for the Quarter:
- Hedge your 2026 travel now: If you have a trip planned for late 2026, consider buying half of your USD now. The risk of the loonie dropping to 0.68 is lower than it was last year, but the "upside" is likely capped at 0.75.
- Watch the Fed's June meeting: This is the big one. Most analysts, including those at KPMG, expect the Fed to finally start a real cutting cycle in June. That is when the loonie could see its biggest jump of the year.
- Monitor the WTI/CAD correlation: If oil breaks $90 and the loonie still doesn't move, it’s a sign that political risk (tariffs/trade) is the only thing driving the bus. In that case, expect the CAD to stay weak regardless of energy prices.
The Canadian dollar isn't "broken," it’s just navigating a very narrow channel. Between the Fed’s stubbornness and Canada’s demographic shift, the loonie is fighting for every cent. Don't expect a return to the "glory days" of parity anytime soon, but a slow grind back toward 0.75 is the most likely path as we move into the second half of the year.