USD: Economic resilience meets hawkish Fed minutes
The recent wave of economic releases suggests the American economy finished the year on a surprisingly high note, with December and January data across housing and manufacturing consistently beating expectations. Most notably, housing starts surged to over 1,404k units and industrial production for January expanded by a robust 0.7%, significantly outpacing the initial consensus forecast. These developments have created clear upside risk for fourth-quarter growth projections; the Atlanta Fed GDPNow estimate has climbed toward 3.7%, sitting well above the earlier 2.6% forecast and the more conservative Blue Chip consensus. This broader economic engine is running much hotter than previously anticipated, driven largely by a resurgence in manufacturing and heavy investment in the technology sector as companies continue to funnel capital into artificial intelligence infrastructure.
This underlying strength has prompted a notable shift in tone from the Federal Reserve, as today’s minutes skew decidedly hawkish. While lingering worries about persistent inflation remain, there is a marked decrease in concern regarding the labor market. Most significantly, the record of the January meeting showed that several participants supported a “two-sided description” of the committee’s future interest-rate decisions. This indicates that if inflation remains at above-target levels, the Fed is prepared to consider upward adjustments to the target range for the federal funds rate, rather than just maintaining or cutting them. This policy pivot suggests that the central bank is prepared to lean against the current growth momentum if it threatens price stability.
The Fed’s focus on persistent inflation aligns with the durable domestic demand seen in recent hard data. While soft retail sales in December initially raised some eyebrows, the broader shift toward service consumption suggests that the consumer remains resilient. If the trade deficit narrows as some economists now expect, manufacturing gains and steady service spending could provide the additional momentum needed to carry this economic strength deep into 2026. This backdrop of resilient growth has also provided a steady floor for the U.S. Dollar, which has trended higher as investors weigh strong domestic data against a more stagnant global environment.
The volatility of the currency market was further addressed in the minutes, which confirmed the much-speculated Japanese yen “rate checks” from January. The Desk noted that these requests for indicative quotes were made solely on behalf of the U.S. Treasury, acting in the New York Fed’s role as fiscal agent. Despite these fundamental strengths and clarified policy stances, the reaction in equity markets has been characterized by significant internal volatility and cautious positioning from large speculators. Even though the S&P 500 remains relatively flat for the year, this surface-level stability masks massive dispersion. Professional traders have maintained net short positions on futures since the start of 2025, showing a persistent skepticism that contrasts with the improving growth narrative but aligns with the Fed’s renewed willingness to hike rates if necessary.
CAD: Still lagging the majors
Heading into 2026, the extreme pessimism that previously plagued the Canadian Dollar has officially flipped. As the chart illustrates, speculative positioning against the Loonie, which plummeted to record net short levels of nearly 250,000 contracts during 2024 and 2025, has staged a strong recovery. The “unwinding” of these bearish bets has pushed the currency back into net long territory, with positioning currently sitting at 6,000 contracts. This shift marks a return to sentiment levels not seen since 2022, effectively removing the persistent structural headwind that characterized the previous two years and signaling a fresh bullish outlook for the currency.
This shift in positioning has translated into tangible strength in the spot market, with USD/CAD retreating from late-2025 highs toward the 1.36-1.37 range. As noted in the G10 performance chart, this move is heavily influenced by a broader -0.8% decline in the US Dollar Index (DXY) rather than purely idiosyncratic Canadian strength.
The stabilization of risk reversals, which have moved from a bearish bias two weeks ago to hovering near zero (flat), further confirms that the options market is no longer pricing in a significant premium for protection against further CAD weakness. The pair is now trading in a more neutral range, as the extreme bearishness of 2024 and 2025 has been replaced by a modest net long position.
Despite the recent unwinding of bearish bets, the Canadian Dollar is noticeably lagging its G10 peers to start 2026. While the Loonie has moved into a slight net long position, its year-to-date performance remains a modest +0.4%, failing to capture the significant upside momentum seen in other major currencies. In stark contrast, other commodity-linked and high-beta currencies have surged, with the Norwegian Krone (+6.1%) and Australian Dollar (+5.9%) leading the pack. The New Zealand Dollar has also outperformed the CAD significantly with a 4.0% gain. This divergence highlights a relative lack of specific demand for the CAD. While it is benefiting slightly from a softer Greenback (DXY -0.8%), it is not attracting the aggressive capital flows lifting its antipodean and Scandinavian counterparts. Tariff risk premiums and a stagnant economy outlook will likely continue to cap further gains despite the sentiment recovery.
Emerging LatAm: High yields drive emerging market performance
The opening weeks of 2026 have signaled a major rotation of capital into emerging market local assets as a softening US dollar encourages investors to move away from traditional developed market havens. This trend is largely supported by a broad normalization of valuations and a drop in exchange rate volatility which has significantly reduced the risk premium required for cross border investments. Current market conditions draw striking parallels to previous cycles of outperformance such as the post crisis liquidity surge of 2009 or the commodity recovery witnessed in 2016. By focusing on a combination of high yields and steady growth, investors are finding that the perceived safety gap between established and developing economies is narrowing which allows Latin American and European emerging markets to lead global performance.
Sustainable growth in these regions remains dependent on global real yields staying low enough to preserve the appeal of the carry trade while metals momentum continues to support favorable terms of trade. Although equity markets have been energized by expansionary impulses and rising investment in artificial intelligence, there are underlying risks involving a potential return of inflation as commodity prices and factory costs climb. Market participants are carefully monitoring a busy election calendar in countries like Brazil and Colombia where political shifts could impact policy credibility and disrupt the current period of stability. Any sudden rebound in the US dollar or a broader global growth scare could also challenge the existing narrative and force a revaluation of the risk premia that currently keeps financial conditions loose.
The Mexican Peso highlights this broader resilience as it continues to navigate a complex environment of domestic stability and international trade uncertainty. Even with reports suggesting potential changes to regional trade pacts, the currency has maintained its position as a top performer thanks to a decisive monetary policy stance from the central bank. By holding interest rates at 7% to counter core inflation pressures, the local board has ensured that the currency offers a 325 basis point advantage over the Federal Reserve. This robust yield differential has solidified the status of the peso as a preferred choice for global asset managers looking to diversify into local assets while seeking protection against broader market swings.
Market snapshot
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Calendar: February 16 – 20
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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.
