A weaker

American dollar

has been a friend to Canada’s currency this year, but strategists say the market may be underpricing a big risk on the horizon.

Most of the

Canadian dollar

‘s recent strength has come at the expense of the U.S. dollar, which has dropped one per cent this year, after shedding about eight per cent in 2025.

The greenback has come under pressure over fears about the “Sell America” trade, mounting debt in the U.S. and expectations that the

Federal Reserve

will cut interest rates.

So while the loonie has gained, it’s not because of confidence in Canada’s economic outlook, said Mirza Shaheryar Baig, a foreign exchange strategist for Desjardins Group.

Rather recent moves appear to be driven by traders unwinding a large short Canadian position, switching to net long for the first time in three years, he said.

Canadian pension funds also likely increased their currency hedges in January as the U.S. dollar sold off and geopolitical concerns escalated.

And Canadian equities have experienced a surge in inflows as investors turned away from crowded U.S. tech stocks.

“Currency markets have short attention spans,” said Baig.

“While traders are fixated on broad-based USD weakness, the risk of a negative CUSMA review outcome has quietly faded into the background.”

A review of the

Canada-United-States-Agreement (CUSMA)

gets underway this year and while most economists expect the trade pact to survive, there is always the chance that President

Donald Trump

could walk away from a deal.

The agreement currently shelters Canada from the worst of Trump’s tariffs and its collapse would almost certainly thrust the

economy into recession.

“For investors with CAD exposure, that is a tail risk worth taking seriously, particularly given how cheap it currently is to insure against adverse scenarios,” said Baig.

Traders, however, are not pricing in “meaningful risk premia for a no-deal outcome,” a complacency that is showing up in options markets, said the strategist.

Expectations of volatility in USDCAD are low and the term structure flat, suggesting the market does not anticipate any disruption even as the major policy event approaches.

The “skew” continues to favour USD puts, which means traders are betting against the U.S. dollar rather than for protection against a sharp depreciation in the Canadian dollar.

This wouldn’t be the first time markets underpriced a well-flagged tail risk; in fact they are notorious for it, said Baig.

In 2016, just before the

Brexit vote in Britain

, polls were pretty much split down the middle. Yet the Leave vote shocked traders and sent the pound sterling down 10 per cent in a single session.

Shirley Huang, senior analyst, global fixed income and currencies at RBC Global Asset Management, said trade policy and CUSMA negotiations present “material risks” that could bring higher than average volatility to the currency in the first half of the year.

If the Sell America trade continues and the U.S. dollar weakens further, the loonie could climb towards 77 US cents, say analysts. But a bad CUSMA outcome could send it back towards 70 US cents. The loonie was trading at 72.90 today.

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The Canadian boycott of American travel is still going strong, according to the

latest figures out from Statistics Canada.

Ten million fewer Canadians crossed the border to visit the United States in 2025, falling from 39 million in 2024 to 29 million. That’s a 25 per cent drop.

Americans travelling to Canada dropped from 23.5 million in 2024 to 22.8 million last year, a decline of less than three per cent.

The 671,000 fewer Americans, however, was mostly offset by an increase of 477,000 travellers visiting Canada from overseas, said Kari Norman, senior economist with Desjardins Group.

 

  • Canada’s big banks begin reporting earnings today starting with the Bank of Nova Scotia. Bank of Montreal and National Bank of Canada are on Wednesday, followed by CIBC, TD Bank and Royal Bank of Canada on Thursday.
  • Today’s Data: United States whole trade sales and Conference Board consumer confidence
  • Earnings: Home Depot Inc., Cargojet Inc., Topaz Energy Corp., Keurig Dr Pepper Inc, Element Fleet Management Corp.

  • Capital markets expected to drive Big 6 banks as earnings season kicks off
  • Garry Marr: There’s a great divide in Canada’s office real estate market and it’s creating big winners and big losers
  • William Watson: The problems with trying to measure productivity

A New Brunswick man helping his wife manage her brother’s estate ran into a snag when it was revealed that the deceased had never claimed his share of his mother’s life insurance and stock accounts. Should they make the claim now so the proceeds become part of his estate, or do they have to wait until probate has been completed?

FP Answers has some suggestions.

Interested in energy? The subscriber-only FP West: Energy Insider newsletter brings you exclusive reporting and in-depth analysis on  one of the country’s most important sectors.

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s

Financial Post column

can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his

mortgage rate page

for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

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YouTube channel

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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  • Forget tariffs, here’s how Trump is really making money off Canada
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