Canada is at the nexus of several major trends that will unfold in the second half of the decade. It’s a big challenge but it’s also a huge opportunity that could unlock a geographically-gifted country that’s trading at a discount.
Things I’m watching:
1) Tariffs
I’ve long said that I think they’re a bluff. That was a tough call when the market was panicking at the start of February but now everyone is shrugging off tariff headlines and the March 4, Canada/Mexico deadline doesn’t look like a real one. I think there will be some angst as we get close to that but I continue to believe that the real ‘ask’ from the US is an earlier renegotiation of USMCA. Given the political uncertainty in Canada, I don’t see Trudeau agreeing to that but Mexico may have other ideas and that could complicate it. In any case, I don’t think the stakes are high for Canada is a renegotiation and reciprocal tariffs aren’t a problem for Canada.
2) US and Global Growth
In the bigger picture, the US engaging in broader tariff wars is a risk for Canada via slower global growth. We’re seeing a concerning deterioration in survey-based data in the US and globally. Wal-Mart this week also warned on US consumers. There is a strong consensus that the US election will release some pent-up demand and business executives are upbeat. There is a different message from consumers though and it could be as simple as: We thought Trump would bring prices down but that’s not happening.
3) China
In the month ahead, China is the spot to watch. The sentiment around China is rapidly changing, and it’s the DeepSeek trade I flagged a month ago.
That’s the whole story and the right trade for now. China scored a win. Buy China.
It
also helps that Chinese stocks are very cheap and the market will soon
fall in love with the idea of stimulus at the March 7 National People’s
Congress (there is still time to front-run the front-run. Markets also
crave underdog stories, and China fits perfectly—cheap, hated, and now
“solving” AI’s cost problem.
That March 7 date is now fast-approaching and China needs to deliver. I sense an improvement in the on-the-ground sentiment in China but some real stimulus would kick it up a notch and could fire up a global commodity rally, something that would be benefit the loonie.
4) Oil
Oil isn’t the big CAD driver that it used to be but we’re at the seasonal trough for crude right now and there are signs of a tighter market than expected. Cold weather has helped to draw down distillate inventories and the US is eyeing tighter sanctions on Iran. That’s balance right now by expectations about an end to the Ukraine war but it’s not clear how much extra oil Russia can export, plus the pipeline problems in Kazahkstan could take months to fix. In the bigger picture, it’s increasingly clear that US shale is tapped out as a source of supply growth, especially at $70 WTI. Note that oil is currently trading below where it was just prior to the Ukraine war.
5) Politics
At the turn of the year it was a foregone conclusion that Pierre Poilievre would be the next Canadian Prime Minister and with a large majority. That’s no longer the case as polls show that presumptive Liberal leadership winner Mark Carney is closing in.
The latest Canadian poll from Angus Reid
There will be some twists and turns here but the market would prefer Poilievre. Also critical is how Carney runs in the general election. He’s cozying up to Liberals right now to win the nomination but he may look to distance himself in the election and I think he has a good read on the pulse of the country with his slogans of “it’s time to build”.
I believe the next decade in markets belongs to whoever learns to build again. A high-speed railway announcement this week in Canada is a good first step but announcements are easy and actually building is hard.
The bigger point is that there is an incredible shift in attitudes in Canada and many other places right now. It’s assertive and hungry for economic progress. Whether it’s Carney or Poilievre at the helm, unlocking Canadian institutions in a way that sparks construction and investment is critical.
6) Housing
It’s not looking good for the Canadian housing market. Inventories are rapidly rising and buyers simply don’t have the money or credit to buy at the prices that sellers expect. The market is priced for 42 bps in easing from the Bank of Canada this year but that isn’t going to help and some inflationary impulses are going in the wrong direction. That could worsen on tariffs or a China-led bull market in commodities.
The most-worrisome development is that investors are completely out of the market, at least in Ontario. The cap rates are terrible and investors on net are likely to be sellers rather than buyers in the coming years. The condo market is a train-wreck that will take years to sort out but the single-family market outside of Toronto also has some pain coming. I tend to think the poor weather lately is restraining supply and that we will see a surge of listings in the spring as the snow melts, that will be a dicey moment that could indicate to Canadian consumers that they’re not as rich as they think.
7) Consumer spending
Today’s Canadian retail sales report was strong but not as strong as it first looked. The HST holiday led to a boost in spending but it faded in the advance January number and tariff uncertainty along with bad weather is likely to lead to a dismal February reading that will be compounded by the end of the tax holiday in March.
Canadian Tire last week said that an early-year uptick in consumer confidence was “substantially erased” by tariff worries and that mortgage renewals continue to be a headwind. They’re cautiously optimistic but the poor market reaction in the stock tells a different story.
The Canadian dollar
USD/CAD monthly
The good news is that the bad news is mostly priced in.
The Canadian dollar was beaten up in the months leading up to February. It hit a 20-year low in early February but has carved out a nice reversal, falling nearly 600 pips from the February high. If it can hang on at these levels through next Friday then that’s a great starting point, particularly if tariffs in early March don’t happen (which is what I expect).
Everything going right for Canada would look like:
- Conservatives winning a majority government and delivering bold actions to spur growth and an assertive agenda for Canada
- Tariff falling off the agenda and USMCA renegotiations pushed back to the scheduled H2 2026 timeline
- Signs of life in the spring housing market
- Declining uncertainty leading to an upside surprise in consumer spending
- Real China stimulus in March
That looks like the case for a long-term bottom this month in the Canadian dollar with a year-end rate near 1.35, and perhaps lower. Much of that will depend on what happens with the US dollar as Congress gets set for a budget battle but for the first time in years, there is room for optimism.
This is a big change for me as for over a year, I was extremely bearish on the loonie.
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