All that hot air from Donald Trump is fogging up the crystal ball.
The loonie should edge higher in 2026, but that’s no sure thing, thanks to economic uncertainty because of the U.S. president’s global trade war, according to currency analysts and economists.
Crunching economic data to put together a forecast is challenging but doable, says BMO’s Bipan Rai. But the non-data side is a lot tougher to pin down, said Rai.
“The one thing I struggle with and I suspect a lot of strategists and private sector economists really have difficulty with is projecting what’s going to happen at the political level,” said Rai, a long-time currency strategist who’s now the head of ETF strategy at BMO.
And the political side of things is a lot more unsettled than usual, thanks to Trump’s trade policies.
“So much is really driven by what’s going on in terms of negotiations for the USMCA, whether or not there’s going to be additional tariffs and levies,” Rai said. “I mean, these are all factors that people like me have to take into consideration. You can make a reasonably strong case that…this is one of the more difficult years to to forecast.”
BMO’s official forecast has the loonie rising as high as 75.19 cents (U.S.) during 2026, up from 72.59 cents on Dec. 12.
Scotiabank also has the loonie hitting 75.19 cents in 2026. The biggest reason, says Scotia’s chief currency strategist Shaun Osborne, is that the Bank of Canada is almost certainly done cutting interest rates (and could bump them higher), while the U.S. Federal Reserve is just getting started.
“We think there will be lower rates in the U.S. and higher rates in Canada, which means a significant narrowing in the policy spread. That should be good for the Canadian dollar,” said Osborne.
That “policy spread” is the difference between the flagship interest rates set by the national banks on either side of the border. The Bank of Canada left its key overnight lending rate at 2.25 per cent in its final meeting of the year Dec. 10. Just hours later, the Fed cut its “Fed funds” rate a quarter of a percentage point to 3.75 per cent, down from 4 per cent.
That current 1.5 percentage point gap, said Osborne, is expected to all but disappear in 2026, with the Fed trimming another full percentage point, to 2.75 per cent, and the Bank of Canada raising the overnight rate to 2.5 or 2.75 per cent.
Central banks typically cut interest rates to kickstart a faltering economy by making it cheaper to borrow. In contrast, they raise rates to keep economies from overheating. And raising rates attracts the attention of investors looking for better returns — the higher the Bank of Canada goes, the more likely they’ll park their money into Canada investments, fuelling demand for the loonie.
U.S. economic growth is likely to slow down in 2026, said Osborne, making the Fed more likely to cut rates. And with Trump musing publicly about replacing Fed chair Jerome Powell, and also saying the recent cut wasn’t big enough, the pace and size of slashing could change, Osborne added.
“The uncertainty there is what happens with the Fed leadership,” said Osborne.
There’s also significant uncertainty for the Canadian economy, Osborne noted, with continuing discussions over U.S. tariffs, and a renegotiation of the Canada-U.S.-Mexico Agreement on trade coming in 2026. Trump and his trade representatives have suggested publicly that the U.S. could pull out of it entirely.
The uncertainty, however, is definitely stronger on the U.S. side, both at the policy level, and when it comes to basic data, argued Pedro Antunes, chief economist at the Conference Board of Canada, an economic think tank. The U.S. government shutdown delayed the release of vital economic data, Antunes noted, meaning that we don’t know the present state of the economy. And all the trade uncertainty means we don’t exactly have a firm grasp on the outlook, either.
“We don’t really know what’s happening in the U.S. right now,” said Antunes.
Still, the uncertainty is more about the scale and timing of the pain for the American economy, Antunes added.
“I think the policies that have been taken up are really a disaster for the U.S. economy. It’s just going to take some time before it can pan out,” Antunes said.
As for the level of uncertainty in forecasts right now, Antunes said it’s a bit lower than during the global COVID-19 pandemic — but that’s not saying much.
“Is this more uncertain than usual? I mean we did go through COVID, and that was crazy. So I’d say it’s better than COVID, but probably worse than most,” said Antunes.
