Trade: Carney’s China gambit baits Trump
Prime Minister Mark Carney’s overseas push—geo‑economic arbitrage in plain sight—traded a narrow EV‑duty concession for Beijing lifting tariffs on Canadian canola and lobster. Washington didn’t go to DEFCON 1 right away: President Trump initially signaled that if Canada could land a good bargain, it should take it. The tone flipped after Davos, where Carney urged middle powers to push back on “hegemons”—a line read as a challenge to a U.S.-centric order. That’s when the hammer came down: Trump threatened 100% tariffs on all Canadian goods over what he branded a “deal with China.” Ottawa moved to cool things: Trade Minister Dominic LeBlanc stressed this isn’t a China FTA—just targeted fixes to specific tariff irritants. In short, a small, transactional swap has been recast as a bigger geopolitical test.
The bigger risk is how this spills into the 2026 CUSMA review. If Washington treats the EV carve‑out as precedent—and keeps the 100% tariff threat in the toolbox—expect harder lines on autos and batteries (rules of origin, content thresholds), stricter views on subsidies and de minimis, and broader tariffs floated as leverage. Three paths from here: base case—loud rhetoric, limited action; risk case—targeted sector hits (autos, ag, clean tech) that affect supply chains and delay investment; tail risk—an all‑goods move that overshadows the review and forces defensive concessions. The most important question now is whether Trump follows through—he often pushes to the edge, then pivots at the last minute.
CAD: Still lagging the majors
Heading into 2026, the extreme pessimism that previously plagued the Canadian Dollar (CAD) has dissipated. As the below chart illustrates, speculative positioning against the Loonie—which had reached deep net short levels of approximately 175,000 to 200,000 contracts throughout late 2024 and 2025—has significantly normalized. The “unwinding” of these bearish bets helps remove a persistent structural headwind for the currency. This shift in sentiment is a critical driver for the recent recovery, as the market moves away from the heavy short selling that characterized the previous two years.
This shift in positioning has translated into tangible strength in the spot market, with the USD/CAD retreating from highs near 1.41 down toward the 1.37 level. As noted in the second chart, this move is heavily influenced by broader USD soft sentiment rather than purely idiosyncratic Canadian strength. The stabilization of risk reversals (which are now hovering near zero) 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 lower range, finding traction as the US Dollar softens globally.
From a technical perspective, the Loonie’s recovery is underscored by strong momentum, evidenced by “four consecutive days of gains” for the currency (declines in USD/CAD). The below chart shows the pair slicing through key intermediate support levels, including the 20-day, 40-day, and 60-day moving averages. While this sharp move has pushed the Relative Strength Index (RSI) toward oversold territory (below 30), suggesting the pace of the decline may slow, the break below these technical averages signals a decisive shift in short-term trend in favor of the Canadian Dollar, potentially targeting the 200-day moving average near 1.38 as resistance-turned-support. A rebound closer to 1.37 is likely as the level has become a long-term key support-resistance
Despite the recent unwinding of bearish bets, the Canadian Dollar is noticeably lagging its peers to start 2026. While the Loonie has stabilized, it is flat (0.0%) year-to-date, failing to capture the upside momentum seen in other major currencies. In stark contrast, other commodity-linked currencies like the Australian Dollar (+3.1%) and New Zealand Dollar (+3.0%) have surged, leading the G10 pack. This divergence highlights a lack of specific demand for the CAD; while it is benefiting passively from a softer Greenback (DXY -0.3%), it is not attracting the aggressive capital flows that are currently lifting its antipodean and Scandinavian counterparts. Tariff risk premium puts a cap to further gains.
USD: Two headwinds, one amplifier
The US dollar index – the DXY – dropped nearly 2% last week, its worst weekly performance since May 2025 when bearish sentiment peaked following the “Liberation Day” turmoil, and the weakness has extended into today’s Asia session. A confluence of factors contributed to the move, magnifying a decline that a tariffs-related sentiment drag alone may not have justified.
To start with, dollar sentiment weakened on the back of Trump’s hard-line stance on Greenland, including the coercive use of tariffs as a negotiation tool. This was paired with domestic political noise that added to the drag. The DoJ investigation involving Chair Powell, scrutiny around the Fed leadership transition, and the pending Supreme Court ruling on tariff authority all resurfaced within days of each other. None of these themes were new, but their clustering created a stronger bearish impulse.
Then came rising expectations that the BoJ and the Fed may step in jointly to contain yen weakness through intervention, sending USD/JPY as low as 153.40 during the Asia session today, the weakest level since mid‑November. The discussion around a potential currency pact emerged on Friday after reports that the Federal Reserve Bank of New York had contacted financial institutions to ask about the yen’s exchange rate. Wall Street interpreted those inquiries as potentially laying the groundwork for Japan to intervene with support from the US. Recent communication from Finance Minister Katayama and Treasury Secretary Scott Bessent also hinted at the possibility of joint intervention. The hit to the dollar from this coordinated signalling stems from two channels. First, it implies US openness to a softer dollar, which supports US export competitiveness. Second, expectations of Japanese intervention have repriced USD/JPY tail risk, making JPY‑funded carry trades less attractive and removing a key source of marginal USD demand, which has amplified the broader weakness.
Finally, positioning has been the ultimate amplifier. With asset managers adding to USD longs for two straight weeks while leveraged funds increase bearish bets, the dollar’s recent softness may be concealing a distinctly tactical character. Yes, some investors cut USD exposure out of caution, but others may be trimming longs with the intention of re‑entering at better levels ahead of the Fed this week. After all, before this geopolitical turbulence, the dollar had been firm, cautiously embracing a hawkish Fed repricing narrative. And with a precedent of quick turnarounds following geopolitically driven volatility, the tactical instinct appears logical.
The FOMC’s 28 January meeting in fact sits at the centre of this week’s price action and also serves as a diagnostic tool for last week’s drivers. The meeting may help reveal whether the recent selling was driven by fear or by tactical long‑term buyers acting opportunistically. Should the dollar firm this week, it would suggest that the earlier weakness had a strong tactical character.
Beyond rates, earnings from the Magnificent 7 this week are highly anticipated as a gauge of AI‑profitability momentum. We will also note the final release of nonfarm productivity and unit labour costs this week (Thursday). Doves have leaned on these prints as evidence of AI‑fuelled productivity gains and lower unit labour costs, both of which may help cap inflation pressures.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: January 26-30
All times are in EST
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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.
