Outlook For Near Term Trade
Part of January’s deterioration is expected to be reversed in February. Higher energy prices linked to the conflict in the Middle East are expected to lift Canada’s net exports in March. Early 2026 trade is taking place with a more stable trade policy backdrop. In January, 89.5% of exports were duty-free to the US, up from 89.2% in December. The labour market has shown per-person improvement, with the unemployment rate edging lower in recent months. Domestic demand has continued to grow on balance. Canada’s trade deficit widened to $3.6 billion in January, which is currently weighing on first-quarter GDP growth. This headline weakness was driven by a 4.7% drop in exports, creating some bearish sentiment. The initial data suggests a drag on the economy that could pressure the Canadian dollar.Trade Driven Currency Strategy
However, we see the January weakness as temporary, heavily influenced by volatile gold and auto shipments. The key factor for the coming weeks is the conflict in the Middle East, which is expected to boost our net exports in March. Recent data confirms this, with West Texas Intermediate crude prices climbing above $95 a barrel, a level not seen since late 2024. This creates a potential opportunity for traders betting on a stronger loonie in the near term. The negative January report may be fully priced in, so we are looking at call options on the Canadian dollar expiring in late April or May. This strategy would profit from the expected improvement in the February and March trade figures. We remember how the currency lagged for much of 2025 as our interest rate policy diverged from the U.S. A strong rebound in energy exports could reverse that trend. The stable trade backdrop with the U.S., where nearly 90% of our exports are duty-free, provides a solid foundation for this outlook. Furthermore, the domestic economy remains resilient, with the unemployment rate holding steady at 5.7% and signs of growing demand. This strength, combined with recent inflation ticking up to 2.9% in February, limits the chance that the Bank of Canada will cut rates. This underlying support should provide an additional tailwind for the currency against the US dollar. Create your live VT Markets account and start trading now.
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