Economic Outlook and Summary
January delivered a turbulent start to the new year, with markets struggling to digest the geopolitical shock of President Trump’s military operation in Venezuela and threats to invade, annex, or buy Greenland.
Financial markets, including FX, were volatile as events from Japan rippled around the globe. Japan’s Prime Minister, Sanae Takaichi, dissolved parliament and called a snap election for February 8. The Bank of Japan and the Fed reportedly “checked rates,” which raised fears of concerted FX intervention to buy yen and sell U.S. dollars. Trump got into the act when his comments appeared to favour a weaker U.S. dollar.
The month ended with Trump officially nominating former Fed Governor Kevin Warsh to replace Jerome Powell as Fed Chairman. February markets are likely to focus on how U.S. economic data will maintain yen stability rather than further tightening.
Overall, February is shaping up as a transition month where markets will assess whether upcoming data will impact the dovish view from the incoming Fed Chair.
The USD and Federal Reserve
The U.S. dollar dropped sharply until the last few days of January. On January 30, news of Kevin Warsh’s nomination for Fed Chair sparked a round of short dollar covering that saw the U.S. dollar index (DXY) recoup nearly 50% of its losses. The market narrative is confused, as some camps believe Warsh will follow Trump’s lead, lower rates, and devalue the dollar. Other analysts believe that resilient U.S. job openings and stronger-than-expected GDP data support a more prolonged pause in rate cuts.
While dollar momentum remains uneven across pairs, its earlier defensive tone is fading, and any renewed risk aversion tied to geopolitics or weaker equity sentiment could lend short-term support. Overall, the greenback looks poised for consolidation in February ahead of a probable softening in Q2 once global rate cut momentum begins to align more clearly with Fed expectations.
The Canadian Dollar and Bank of Canada
The loonie rallied alongside the other G-10 majors as Japanese politics and concerns about BoJ/Fed intervention to support the yen fuelled yen sales against the G-7 major currencies. That wasn’t all. Geopolitical tensions rose, and Trump’s administration increased its hostility toward Canada.
Prime Minister Mark Carney met with China President Xi Jinping, and both leaders agreed to lower tariffs to 2019 levels, at least on EVs and agricultural products. Trump said Carney was smart to do so, and then a week later he, and his minions, threatened dire consequences if Canada and China signed a trade deal.
The Bank of Canada’s January meeting confirmed no change in its 2.25% policy rate, though the accompanying statement stressed “growing caution” around household debt and slowing global trade. Governor Macklem reiterated that while inflation has moderated, structural tightness in the labour market remains a concern. The USDCAD technicals are bearish and suggest a 1.3475–1.3775 trading range in February.
Oil Prices
WTI oil prices climbed steadily through January, rising from the high 50s into the mid-60s by month end as markets faded early-month growth worries and leaned back into the geopolitical risk premium linked to Venezuela and ongoing Middle East tensions.
Trump’s hijacking of oil tankers carrying Venezuelan crude and his threats of military action against Iran underpinned prices. Those actions shifted the narrative away from “2026 surplus” toward “tight but manageable” balances, even as U.S. inventories remained comfortable.
Looking into February, the WTI bias is modestly higher. A sustained break above 66.00 targets 70, while a move below 60 puts 55 in play.
Sources: Bloomberg, Investing.com, Reuters
Bank 2026-USD/CAD Q1 2026-USD/CAD Q2
Scotiabank* 1.3800 1.3500
BMO 1.3700 1.3600
CIBC 1.3800 1.3700
TD Bank* 1.3800 1.3700
National Bank 1.3900 1.3700
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
