Economic Outlook and Summary
December delivered its usual mix of end-of-year central bank meetings to a shrinking pool of interested observers, as many traders and desks had closed their books for the year. The European Central Bank left rates unchanged and indicated rates would remain unchanged for the foreseeable future. Across the English Channel, the Bank of England trimmed its benchmark rate by 25 bps to 3.75%, and despite four policymakers preferring to leave rates unchanged, the outlook was for another rate cut by March. The Bank of Japan raised its key rate from 0.50% to 0.75%, its highest level in 30 years. The Bank of Canada left rates unchanged, and the Fed cut by 25 bps, as expected.
January has already started with a bang. President Trump unleashed his military to snatch Venezuelan President Nicolás Maduro and his wife from their beds in a fortified residence in Caracas and extradite them to New York City to be charged with narco-terrorism. The first week of the month has started slowly, as many traders are still on vacation.
The USD and Federal Reserve
The U.S. dollar traded defensively throughout December, with selling pressure stemming from the Fed rate cut and exacerbated by expectations for further rate cuts in 2026. Divergent monetary policies from the Bank of Japan, ECB, and Bank of Canada also weighed on the greenback. The greenback recouped some losses after the release of the FOMC minutes on December 30 showed a divided Committee, which suggests policymakers are in no hurry to cut rates.
There is a lot of key data ahead of the January 28 FOMC meeting. Unfortunately, the ongoing fallout from questionable or incomplete numbers due to the October government shutdown suggests a degree of U.S. dollar volatility, despite low odds of a rate cut on that date.
The Canadian Dollar and Bank of Canada
The Canadian dollar finished December on a firm footing, posting a 1.83% monthly gain and ending the year up 4.39%. The Bank of Canada left its benchmark rate unchanged at 2.25%, a widely anticipated decision. The December 23 Summary of Deliberations revealed policymakers were encouraged by upward revisions to GDP for the previous three years, but remained uneasy about uneven underlying momentum, particularly the ongoing weakness in business investment.
Looking ahead to January, the Canadian dollar is likely to remain tethered to broad U.S. dollar sentiment rather than domestic fundamentals.
USDCAD has edged higher since Boxing Day in thin holiday trading but remains firmly trapped within the well-defined 1.3600–1.4000 range that has capped price action since July. With no clear domestic catalyst on the horizon and liquidity normalizing only gradually, price action in January is expected to remain range-driven, with rallies fading near the top of the band and dips attracting support toward the lower end.
Oil Prices
WTI oil prices drifted lower into mid-December as concerns over U.S. interest rates and an expected crude surplus in the first half of 2026 weighed on sentiment. Those worries were quickly overtaken by political shockwaves after Trump’s move to remove the Venezuelan president, followed by an announcement that the U.S. had taken control of Venezuela’s oil assets and secured an agreement for 50 million barrels of supply. Despite the headline drama, WTI prices have remained stubbornly rangebound. Looking into January, upside momentum is likely to be capped by ample inventories while downside risks are cushioned by geopolitical uncertainty, leaving prices biased toward a 55.00–60.00 trading range.
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 1.3800
TD Bank* 1.3900 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.
