Robust Capital Markets Activity Supports Canadian Dollar Confidence.
The Canadian dollar is getting strong support from the capital markets, which is helping steady the currency heading into the rest of 2026. The loonie faced pressure from U.S. policy changes in 2025 but is finding a cushion in higher capital inflows this year.
How the Loonie Fared in 2025
2025 is aptly called a year of surprises for the loonie after it went through three stages of unanticipated performances. The CAD initially dropped to a multi-year low as U.S. tariff announcements drove markets into a panic. Yet, it made a remarkable reversal in time, as data from the forex trading app shows. The loonie rallied about 7.2% to hit highs of about 73.7 cents US in June/July.
Having made that recovery, and especially with the US dollar facing stiff pressures, the loonie showed strength, ending the year on a relatively high note against the USD. Although it had a successful showdown against the USD, the loonie was clearly outstripped by other currencies. At least 12 of the most-traded currencies ended 2025 above the loonie performance-wise.
The Bank of Canada’s rate cut in late October piled short-term pressure on the loonie but ultimately became a crucial stabiliser to support economic recovery late on. Falling oil prices and downward revisions to growth forecasts triggered and sustained severe volatility in 2025.
Capital Markets See Resurgence in 2026
In the third quarter of 2025 (Q3), Canada’s FDI reached its lowest level since Q2 2024, declining to C$42.8bn ($30.6bn). Mergers and acquisitions and reinvested earnings from foreign affiliates were the key drivers of FDI last year as investors showed strong confidence in the economic stability. Canada had the second-biggest FDI tock to GDP ratio among the G20 in 2024 and maintained a best second position on the Kearney FDI Confidence Index last year.
The International Monetary Fund (IMF) has a 1.5% growth forecast for Canada, expecting a largely stable condition amid increased uncertainty. This is seeping into the capital markets, where equity financing has doubled and local, Canadian-led transactions provide an anchor for growth. The key drivers for capital markets resurgence are high-value, large-cap deals in infrastructure, resources, and finance, equity issuance, and M&A activity.
M&A Surge
The nation’s M&A reached a stable footing in 2025 and is maintaining that trend so far in 2026. Major deals in AI and defense, resource, and infrastructure show the market favors domestic strategic acquisitions. Canadian-controlled transactions gained momentum, making up nearly half of all activity. A key trend is the increased use of earnouts to manage uncertainty and bridge evaluation gaps.
Dealmakers put up an admirable show in 2025, pushing and shaping the economy by capturing new opportunities and building stronger businesses. The federal government also played a key role, with its November 2025 budget release bringing clarity to M&A transaction targets. One surprising thing is the transfer of wealth and business assets from older Canadians to the next generation; the nearly $3 trillion shift is driving M&A in wealth management. Analysts predict an increase in M&A activity in 2026 and a greater emphasis on speed.
FDI Catalyst
Canada is happily recording increased portfolio investment and FDI, which have provided critical support for the loonie. This supports diversification beyond traditional commodity-driven investments. The bond market has experienced a surge in foreign demand as Canadian government bonds reflect a stable economic backdrop. For context, foreign investors are buying government bonds at a faster pace, providing the much-needed structural counterbalance to commodity volatility.
There is also an increase in services-based inflows and global demand for safe-haven minerals. Canada, in 2026, has seen foreign sovereign wealth funds and private investors pivot towards its technology, with recent investment partnerships with Qatar’s sovereign wealth fund worth billions.
Loonie Confidence Grows
Investors are confident in the loonie this year thanks to interest rate differentials with the U.S., broad USD weakness, crude oil rebounds, and institutional stability.
The BoC has maintained its policy rate at 2.25% for January, as Governor Tiff Macklem said it is “difficult” to predict rate changes due to high trade uncertainties. The U.S. Federal Reserve, however, is expected to announce several rate cuts in 2026. That would widen the yield gap and provide support for the loonie.
But the Fed’s rate cut, alongside a loss of investor confidence in the USD following tariff wars, pushed the USD to new four-year lows earlier this year, and the DXY is trading near as markets open for the last week of February. President Donald Trump’s new blanket 15% levy on imports will further weaken the USD.
WTI crude oil has rebounded in 2026, rising from 58.66 on 30 December 2025 to 65.72 on 23 February 2026. This is strengthening Canada’s trade position, and the impact is pushing the loonie above 1.3650 in Monday’s Asian session.
Trends for Canada’s Capital Markets in 2026
A transition toward fundamentals-driven growth will define Canada’s capital markets in 2026, especially as investors become cautious following a period of high volatility and aggressive interest rate cuts. The IPO market will play a much more important role this year as it awakens after years of dormancy, and technology and natural resource IPOs are leading the analyst interest.
Cooling inflation and modest GDP growth will keep interest rates steady, allowing companies to enjoy long-term stability. This, in turn, will stimulate growth and development across sectors. Finally, the exchange-traded funds (ETFs) market is maturing and will attract more attention this year. Active ETFs already make up about 28% of total assets, and this will grow as more people adopt options-based strategies.
A Positive Outlook for the Canadian Dollar in 2026
The loonie’s current form indicates investors’ confidence in Canada’s capital markets. Surging FDI flows underline where investors think the markets are heading and have cushioned the impact of commodity volatility in recent months. The government will be out to maintain a conducive business environment and provide the infrastructure and fiscal inducements necessary for growth.
