The Canadian dollar strengthened 0.4% against the U.S. dollar on Friday, reaching its strongest level since February 16 at 1.3626 per U.S. dollar. According to reports from Reuters, the loonie was trading at 1.3630 per U.S. dollar, or 73.37 U.S. cents, after clawing back most of its monthly losses. Among the Group of 10 currencies, only the safe-haven Swiss franc posted stronger gains, with the dollar under pressure from broad-based declines. The currency's strength comes amid mixed global market conditions, with DOW futures sliding more than -500 points after the release of sticky US PPI data, signaling a weaker open as markets react to renewed concerns about monetary policy staying restrictive for longer than previously hoped.
Despite the currency strength, Canada's fourth-quarter GDP fell at an annualized pace of 0.6% in the October-December quarter, as reported by Reuters. Manufacturers dipped heavily into inventories to meet demand, closing out the slowest year of growth for the country since 2020. The contraction was slightly steeper than the 0.2% economists expected, with the weakness largely thanks to a big withdrawal from business inventories that offset growth in exports. The contraction was driven by weaker domestic demand, falling household goods consumption and softer housing activity, though this was partly offset by government spending and positive contributions from net exports. However, Canada's economy closed 2025 on a slightly firmer note with GDP rising 0.2% mom in December, above expectations of 0.1%, with gains in both services-producing and goods-producing industries suggesting a modest rebound in activity toward year-end.
Despite the quarterly contraction, Canada's real GDP grew 1.7% over 2025, the slowest pace since a drop in 2020 during the global pandemic, largely due to a decline in exports to the U.S. However, final domestic demand grew 2.4% on an annualized basis in the fourth quarter after falling 0.5% the previous quarter. Household spending rose 0.4% on a nonannualized basis after weakening slightly in the prior quarter, leaving household consumption for the year up 2.3% and in line with the 2.2% pace in each of the previous two years. The Bank of Canada's relatively positive composition of GDP data is expected to allow the central bank to remain on the sidelines after keeping its policy interest rate steady twice in a row.
Prime Minister Mark Carney's efforts to decouple Canada from U.S. dependence are showing results, with the U.S. going from being the destination for roughly 70% of Canadian exports to about 64% at the latest count. The country's exports were up 1.5% for the final quarter, driven by shipments of unwrought gold and aluminum, though exports for 2025 were down 1.7% as trade with the U.S. failed to fully recover. Economists expect soft momentum in 2026 and the central bank has forecast growth will average about 1.1% for the year, with recovery in exports expected to support stronger growth in the second half, though that hinges on trade talks with the U.S.
George Davis, chief technical strategist at RBC Capital Markets, attributed the loonie's strength to the U.S. dollar coming under pressure from the gold rally, which rose to nearly a one-month high supported by geopolitical tensions after the U.S. and Iran extended nuclear talks. Canadian government bond yields eased across the curve, with the 10-year yield down 3.6 basis points at 3.139%, marking its lowest level since November 28. The yield movements tracked moves in U.S. Treasuries, with the price of oil rising 2.7% to $66.99 a barrel as traders remained on alert for potential supply disruptions, supporting the loonie as oil is one of Canada's major exports. The mixed global market sentiment, with gold and silver rallying strongly alongside falling yields reflecting demand for protection against both macro uncertainty and policy volatility, continues to support the Canadian dollar's resilience.