If the U.S. dollar were breaking up with the Canadian dollar, it would use the oldest cliché in the book: “It’s not you, it’s me.” That’s because the loonie’s recent strength has little to do with Canada’s economic brilliance—and everything to do with the U.S. dollar stumbling under the weight of its own problems.
Let’s break it down.
The loonie has held its ground near 1.38 after bouncing nearly 6% from its January low. On the surface, it looks like Canada’s currency is staging a comeback. But dig deeper, and you’ll see the Canadian dollar is really just standing still while the U.S. dollar is quietly losing its footing.
What’s Dragging the U.S. Dollar Down?
A cocktail of disappointing data, political risk, and fiscal pressure. U.S. GDP for Q1 showed the economy contracted, and weekly jobless claims came in higher than expected. At the same time, a sweeping new tax bill promises to balloon an already massive U.S. debt load—raising fresh concerns about long-term fiscal health.
All this has sparked a re-think among investors, and the U.S. dollar is starting to wobble. The Fed’s path to rate cuts is becoming clearer, and with inflation expected to cool modestly, there’s little in the data to keep the dollar propped up. In fact, today’s PCE Price Index—the Fed’s preferred inflation gauge—is expected to show annual inflation dipping to 2.2%, and core inflation softening to 2.5%. Any downside surprise could accelerate the slide.
Enter the “TACO Trade”
As if things weren’t messy enough, we’ve also got trade tensions back in the headlines. Trump’s renewed tariff threats had rattled markets earlier this year, helping send the loonie to a 10-year low of $1.45. But now? Wall Street isn’t buying it. The prevailing view is that this is more bark than bite—just political posturing to win better deals.
That sentiment has sparked a new market mantra: the TACO trade—short for Trump Always Chickens Out. It’s a bet that the worst-case trade war scenarios won’t materialize. And as that fear recedes, risk sentiment improves—and the U.S. dollar suffers.
Canada’s Growth: Stronger Headline, Weaker Core
Canada’s Q1 GDP rose 2.2% on an annualized basis, surprising markets that had expected just 1.7%. But the story under the surface is mixed. The jump was mostly driven by a rise in exports as U.S. companies rushed to stockpile goods before tariffs kicked in.
But domestic demand tells a different story. Household spending slowed sharply to 0.3%, final domestic demand didn’t grow at all, and a rise in imports led to inventory build-up. StatsCan noted it was the first time since 2023 that final domestic demand failed to increase—hardly a sign of healthy momentum.
Bottom Line
The Canadian dollar isn’t soaring because everything’s perfect up north. It’s just not collapsing like the U.S. dollar. In this breakup, the loonie gets to keep its dignity—not because it’s thriving, but because the other side is unraveling.
The Canadian dollar is currently trading at 1.3759 CAD against the US Dollar.
