Canada: Trading Detroit for the Dragon
For decades, Canada’s economic survival has relied on a single, unshakeable truth: our proximity to the United States is our greatest shield. However, as we enter 2026, that shield has begun to feel more like a cage. Prime Minister Mark Carney’s recent pivot toward China—marked by his historic January visit to Beijing—is not merely a sudden change in trade policy, but a calculated response to an increasingly transactional and unpredictable Washington. With President Trump openly musing about Canada as a “51st state” and threatening broad tariffs on continental trade, the Carney administration appears to have concluded that the “fortress North America” ideal is crumbling from within. This pivot is a “strategic realism” born of necessity, signaling that Canada can no longer afford to be a passive bystander in a trade war it didn’t start.
The immediate tension of this strategy lies in the trade-off between the $19.2 billion automotive sector and the $14.5 billion canola industry. By slashing EV duties to 6.1% for a 49,000-unit quota in exchange for China dropping its 80% punitive tariffs on Canadian seeds and shellfish, the government is making a clear choice to rescue the Prairies at the potential expense of Ontario’s industrial floor. Yet, the math suggests this is less of a “flood” and more of a managed experiment. A 49,000-unit cap represents only about 3% of the total Canadian vehicle market—essentially restoring the 2023 import levels that were largely dominated by Chinese-made Teslas. By framing this as a “stabilization effort” rather than a broad liberalization, the administration is attempting to provide a vital lifeline to farmers while keeping the actual displacement of domestic manufacturing to a minimum.
This high-wire act faces its greatest test with the looming July 1, 2026, CUSMA review. The initial analysis rightly identifies the risk of American retaliation, as Washington could view the EV quota as a “backdoor” for Chinese influence. There is a real danger that the U.S. might invoke Section 301 investigations or apply 40% “transshipment” tariffs on any Canadian-made vehicle containing Chinese components. However, Carney seems to be building a different kind of leverage. By diversifying Canada’s trade portfolio now, he is signaling to Washington that Ottawa has other options. If the U.S. demands extreme concessions during the summer review, Canada now possesses a “snap-back” chip: the ability to return to a hardline stance against China in exchange for ironclad guarantees on North American market access.
Ultimately, this shift represents Canada’s transition from a junior partner in a continental alliance to a multipolar player in a fragmented global economy. Even as the government lowers financial barriers for Chinese imports, it is simultaneously fortifying “regulatory moats” through strict cybersecurity and national-security screenings for connected vehicles. These measures allow Canada to remain technically aligned with Western security standards while reaping the economic benefits of reopened Eastern markets. It is a gamble, certainly, but it is one predicated on the belief that in 2026, the only thing more dangerous than breaking ranks with an unpredictable ally is having no rank to stand in at all.
USD: Tariff certainty is a myth
Global shocks keep piling up — Venezuela, Iran, Fed independence — and now the Greenland dispute has opened a fresh front. US President Trump has threatened a 10% tariff, rising to 25% in June, on eight key European allies for opposing US control over Greenland. The move effectively torpedoes the US‑EU trade truce agreed only six months ago and has forced Brussels to prepare retaliatory tariffs on €93bn of US goods.
The episode has re‑inflamed NATO tensions, blindsided EU leaders, and ensures Trump dominates the agenda at Davos this Wednesday. It also signals that anyone expecting a calmer second year on trade policy may need to rethink — this is starting to look a lot like last year all over again.
The tariff threat injects another layer of uncertainty into an already crowded geopolitical landscape, raising the risk of a broader risk‑off turn if rhetoric escalates. For markets, the immediate pressure point is Europe: EUR and NOK look most exposed to headline risk, while the Swiss franc looks to be the stand-out winner, acting as a natural hedge against geopolitical stress. European equities — particularly exporters and industrials — face renewed vulnerability. Industrial commodities would likely soften on tariff‑driven demand concerns, while gold and silver stand to benefit if tensions spill over into a wider volatility bid.
The US dollar reaction is likely to remain mixed and relatively contained. A modest bout of USD weakness is logical as markets price a more isolationist US stance, briefly reviving the ‘sell America’ narrative and stirring de‑dollarisation chatter, with the country’s sizeable external liabilities back in focus.
Still, investors have grown increasingly numb to tariff headlines, which tempers the downside, and some investors will likely lean into the ‘TACO trade’ — viewing Trump’s tariff threats as a negotiating tactic rather than a firm policy path — offering the dollar a degree of support. Even so, the latest developments serve as a reminder that the US economy is not immune to the uncertainty generated by Trump’s policy shifts, while lingering concerns over Fed independence — amplified by the delayed nomination of a new chair and the ongoing probe into Jerome Powell — add another layer of caution around the US currency.
Emerging Markets: Rally resumed
The global financial landscape in early 2026 is defined by a sustained period of suppressed currency volatility that has paved the way for a highly profitable regime in the foreign exchange carry trade. Following a structural shift in market dynamics during the second quarter of 2025, the inverse relationship between market turbulence and yield-seeking behavior has become more pronounced, allowing the carry index to climb steadily as investor confidence returns. This environment of relative calm has fundamentally lowered the risk premium required for cross-border investments, encouraging a broad-based migration of capital toward high-yielding assets as the fear of sudden exchange rate swings continues to dissipate.
This macro-level stability has acted as a powerful tailwind for emerging market equities, which are aggressively outperforming global benchmarks in the opening weeks of the year. Capital flows are concentrating in regions that offer the most attractive combination of yield and growth potential, with Latin American and Emerging European markets leading the pack and delivering returns that significantly outpace the broader world index. The synergy between a maturing carry trade and surging local equity valuations indicates a robust “risk-on” cycle, where the convergence of currency stability and high-growth prospects is currently rewarding investors who have pivoted toward developing economies.
The Mexican Peso is staging a surprising technical breakout, slicing through key psychological support levels near the 17.60 handle to mark its most significant weekly advance since November last year. This move has effectively invalidated several bearish divergence signals from late 2025, reclaiming momentum with enough conviction to suggest the 50-day moving average, a level it has respected for months, is no longer a ceiling but a launchpad. With USD/MXN now trading at its lowest levels since July 2024, the path of least resistance appears skewed toward further appreciation. However, sustaining double-digit returns remains a high bar for Latin American currencies as they contend with the gravity of a firming Greenback. Should 2026 see even a modest recovery in the US Dollar Index, the Mexican Peso’s yield advantage will likely struggle to drive further spot appreciation.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: January 19-23
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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.
