USD: Dollar bears grapple with growth expectations
Yesterday’s data dump provides a snapshot of an economy that refuses to cool, even if the figures are technically “stale,” reflecting the activity of late 2025.The standout figures from the November reports, retail sales climbing 0.6% (beating the 0.5% survey) and a massive 28.5% jump in MBA mortgage applications, signal a consumer base that remains undeterred by previous tightening cycles. This resilience is directly feeding into the Atlanta Fed’s GDP Nowcast model, which currently estimates Q4 2025 growth at a robust 5.1%. Despite the reporting lags typical of a post-shutdown environment, the underlying domestic demand suggests the “hard landing” narrative is increasingly a fringe view as we move deeper into January.
The puzzle of a “hot” GDP alongside a seemingly stalled labor market is reconciled by recent Dallas Fed analysis, which reveals a profound structural shift: the US labor market now needs to add barely 30,000 jobs a month to stay in balance. This “breakeven” collapse, down from 250,000 in 2023, explains how the economy can print supercharged growth while hiring feels stagnant. It also masks a stark K-shaped divergence; while higher-income tiers benefit from surging productivity and asset prices, the “stalled” headline labor numbers reflect a cooling for the lower-income cohort. This environment allows the administration to pursue a “run the economy hot” policy shift, prioritizing growth at the cost of potential long-term stability.
This policy tilt is already rippling through the commodities market, where a renewed bid for industrial metals and energy could be seen as a hedge against a possible inflationary spiral in 2026. With PPI final demand at 3.0% y/y (surpassing expectations), the market is no longer debating if inflation has bottomed, but rather how high the new “floor” will be. (i.e. where’s the neutral rate going to be). Investors are assessing and wondering if this heat will be a sustainable productivity boom or if the mounting fiscal pressures, will eventually trigger a debt-driven crisis. The fear is that the “run hot” strategy is simply borrowing growth from a 2026 that may be defined by persistent price volatility, especially in commodities markets.
The global backdrop adds a layer of complexity, particularly the “historically unusual” situation in Japan. Prime Minister Sanae Takaichi intensified the pressure yesterday by signaling a snap election for February to secure a mandate for her expansionary fiscal agenda. This political gamble has pushed 10-year JGB yields above 2.1% (levels not seen since 1999), yet the Japanese Yen continues to slide toward the 160 level against the dollar. This rare combination of rising yields and a weakening currency is a worrisome signal for a G-7 economy. It serves as a stark warning of what happens when fiscal credibility is questioned on the world stage.
Looking ahead, the USD outlook for 2026 appears increasingly complex, leaving dollar bears facing a choppy year. While the greenback might find significant relief in Q1 if the post-shutdown US economic revival is confirmed, the sustainability of this strength requires more than just “hot” numbers, it needs data validation that growth can coexist with manageable yields. Without it, the dollar remains at the mercy of evolving Fed expectations and the market’s tolerance for fiscal expansion. Ultimately, 2026 will be a test of whether the USD retains its “safe haven” status or begins to trade like a high-beta growth currency sensitive to the very heat the administration is trying to generate.
CAD: Trade rhetoric threatens Canadian growth rebound
According to statistics Canada, following three years marked by strong population growth, census metropolitan areas experienced significantly slower population increases from July 1, 2024, to July 1, 2025 (+1.0%). In contrast, the population grew by 3.5% from July 1, 2023, to July 1, 2024.
The dramatic slowdown in population growth, stalling toward 1.0% and potentially turning negative in large urban centers, has forced a fundamental reassessment of Canada’s economic trajectory. The Bank of Canada has acknowledged that the era of volume-driven expansion is over, lowering potential GDP growth expectations to reflect a reality where total output remains stagnant. While headline figures look weak, the central bank’s focus has shifted toward per-capita GDP as the primary metric of health. This pivot suggests that for the first time in decades, economic progress must be measured by productivity gains and individual income growth rather than the sheer number of new residents, marking a difficult transition toward a quality-based growth model.
This demographic cooling has also redefined the “breakeven” point for the Canadian labour market. Previously, the economy required around 60K of new jobs each month simply to keep the unemployment rate from rising, but with the sharp decline in non-permanent residents, that requirement has plummeted toward zero. Recent policy signals indicate that this shift provides the Bank of Canada with more flexibility to maintain a neutral interest rate stance, as even modest job gains are now sufficient to keep the labour market in balance. By moving away from the need for high-frequency hiring, policymakers are attempting to navigate a “soft landing” where the labour market stabilizes without the intense inflationary pressures seen during the preceding population boom.
However, the Canadian Dollar remains heavily weighed down by a darkening trade outlook and aggressive rhetoric from the United States. President Trump’s recent dismissal of CUSMA as “irrelevant,” coupled with his insistence that “Canada needs the deal” while the U.S. does not, has cast a long shadow over 2026 rebound expectations. This stance directly undermines the “Fortress North America” vision mentioned previously, which emphasizes an integrated, secure continental industrial base. If the trilateral agreement is dismantled in favor of isolated bilateral deals, Canada faces the prospect of significant economic headwinds and disadvantageous concessions. This scenario leaves the Loonie vulnerable as the country enters a high-stakes period of trade renegotiation.
MXN: New 2026 highs
The USD/MXN is currently trading near 17.83, following a period of persistent Mexican Peso strength to start 2026. Technical analysis of the daily chart shows the pair in a clear downward channel, with the spot price sitting well below the long-term 100-day and 200-day simple moving averages (SMAs) at 18.31 and 18.70, respectively. While recent short-term momentum has moved slightly above the 20-day SMA of 17.95, the Relative Strength Index (RSI) at 32.68 indicates the pair is approaching oversold territory, suggesting that while the bullish trend for the Peso is dominant, a corrective bounce could emerge if it tests the recent lows near 17.79.
The Peso faces significant headwinds that make another year of double-digit returns unlikely. On January 13, 2026, President Trump dismissed CUSMA as “irrelevant,” clouding the outlook for the mandatory trade review due this year. However, Mexico’s proactive implementation of sweeping tariffs—up to 50% on Chinese vehicles and 35% on over 1,400 other product categories—suggests a desperate attempt to align with the “Fortress North America” strategy and appease U.S. demands for a “backdoor-free” market. While this move signals a pivot toward a potential bilateral deal to salvage market access, it also highlights Mexico’s vulnerability; if trilateral protections dissolve, Mexico may be forced into even deeper concessions. Domestically, Banco de México (Banxico) has paused its easing cycle at 7.00% because core inflation remains stubbornly high at 4.43%, well above the 3% target. With narrowing interest rate differentials and a projected GDP slowdown to roughly 1.4%, we can expect range-bound price action around the 18 handle rather than a continuation of the outsized gains seen in previous years.
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Calendar: January 12-16
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
