I usually move incrementally. Several months ago, I pulled off our long-standing bearish call on

the loonie , which held us in good stead. Now we are moving outright bullish and have established a target of 77 cents U.S. for 2026. That may end up proving conservative.

Here are 10 reasons for this latest incremental shift in view.

1. If market pricing in swaps is currently prescient, then the Bank of Canada is basically done cutting rates for the cycle, but the United States Federal Reserve has at least three more moves in its arsenal. There is some market chatter that the next move by the Bank of Canada could well be a hike, with the common

consumer price index (CPI) inflation measure bottoming out above target at 2.7 per cent — the highest since March 2024, when the policy rate was five per cent. It’s 2.25 per cent today, so the Bank of Canada is nurturing an unsustainable period here of negative real rates.

If that is the case, combined with three Fed cuts, that would take the policy rate spread narrower to -50 basis points from -175 basis points currently, and this alone would take the Canadian dollar towards 77 cents U.S.

2. The latest upward revisions to real gross domestic product (GDP) suggest that the output gap is close to closing. This has implications for Bank of Canada policy as well.

The unemployment rate looks to have peaked out, now at a 16-month low of 6.5 per cent from the summertime high of 7.1 per cent, and the employment-to-population ratio has risen to a five-month high of 60.9 per cent — fractionally above the long-run mean going back to 1976.

Wage growth has been sticky as well at four per cent on a year-over-year basis, which is a signal to the central bank that the current jobless rate is likely not far off the non-accelerating inflation rate of unemployment (NAIRU), which is the rate when the economy is fully employed.

3. The Big Mac Index, an oft-used purchasing power parity metric to gauge the degree of under- or over-valuation in any currency, suggests the fair value for the Canadian dollar is 80 cents U.S.

Our proprietary Strategizer model has been flashing a “strong neutral” signal of late as well. We could easily have turned a little more bullish earlier based on this model scorecard, but we awaited signs of a follow-through, which we received in November.

4. The recent improvement in Canada’s moribund productivity performance — two approximately four per cent annualized growth rates in the past four quarters — has led to a complete flattening in domestic unit labour costs in U.S. dollar terms, compared to a 2.4 per cent unit labour cost trend south of the border. This means Canada likely no longer needs the competitive crutch from a weak currency.

5. Global investors are plowing more money into the Canadian economy and the markets. The bleeding from years of net direct investment outflows has not only stopped, but also reversed.

Since the second quarter of 2024, the prior massive outflows have swung to a cumulative net inflow of $11 billion. Over that same time frame, global investors have emerged as net buyers of Canadian securities (stocks, bonds, money market paper) to the tune of nearly $230 billion.

6. At the same time, the trading community has found itself offside. The net speculative short position in the Canadian dollar in the

CME Group Inc. futures and options pits recently totalled 145,000 bearish contracts — only 1.5 per cent of the time have the traders been this short. You need to go all the way back to Aug. 1, 2023, to see the last time the net speculative short position was closed — the loonie closed that day at 75.3 cents U.S.

Because any potential closing this time around comes from a near-record bearish position, the flow-of-funds impact would be so large that our models point to as much as a 10 per cent positive impact on the Canadian dollar, bringing it closer to 78.7 cents U.S.

7. Canada’s terms of trade, the ratio of export prices to import prices, have shown nascent signs of bottoming out since May after declining precipitously over the prior three years, which coincided with the bear phase in the Canadian dollar. Canadian export prices have risen at a five per cent annual rate since that time.

8. We gave the Mark Carney budget a B-, which was the best grade we have dished out since the Stephen Harper years, more than a decade ago. The move to separate the operating and capital segments of the budget was a wise idea, and the former shows no more expansion in wasteful program spending, while the latter revealed an effort to promote supply-side improvement in the country’s capital stock that we have not seen since the Brian Mulroney era in the mid-to-late 1980s.

The fact that the old cabinet faces are being shuffled out is other encouraging news, as is his effort to meet and negotiate with Alberta Premier Danielle Smith, which would not be happening with the prior Justin Trudeau regime.

Hope may not be an effective strategy, but it’s still a hell of a lot better than despair. The fact that all the environmentalists are up in arms with Carney rolling back the Liberals’ climate policies is surely good news for those of us who desperately want to see the pace of Canadian economic activity embark on a sustainable upswing.

9. Both the World Bank and the International Monetary Fund see global real GDP growth hanging in close to a three per cent pace through 2026. Our in-house purchasing managers’ index (PMI) heatmaps have also pointed to growth sustainability. This is important for the Canadian dollar because it is, after all, a torque on global growth — a +70 per cent correlation.

10. Then there’s the divide between reality and perception when it comes to the Donald Trump tariff war. The reality is that, compared to most other countries, Canada emerged relatively unscathed. Fully 90 per cent of Canadian exports were protected by the

Canada-U.S.-Mexico Agreement (CUSMA) and, as such, were not affected. While the U.S. effective tariff rate jumped this year to 17 per cent from 2.5 per cent, it went from zero per cent to just 5.9 per cent for Canada. Yet, there is this perception among the Canadian public that we have been tarred and feathered, and so while Carney dropped his elbows on his reciprocal moves, domestic residents have taken matters into their own hands.

Canadians have become economic vigilantes to the benefit of the local economy. The “Buy Canada” campaign is ongoing and, more tangibly, the staycation theme has resulted in a 22 per cent year-over-year plunge in Canadian trips to the U.S. and a coincident double-digit growth boom in the domestic travel and tourism industry.

When you look at this staycation theme holistically, as in all the multiplier effects that include retailers, restaurants and hotels, this domestic travel thrust touches 4.5 million workers (20 per cent of employment) and $100 billion of GDP (a near-five per cent chunk — as big as the resource patch).

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This is bullish for the loonie because it means that more dollars are being spent at home instead of being converted into greenbacks for the trips Canadians used to make to Palm Beach, Fla., Las Vegas, Scottsdale, Ariz., and Manhattan to such an extent that the travel account, as part of the overall balance of payments, historically in a large deficit position, has now swung to a record of more than $10 billion at an annual rate.