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USD/CAD to Hit 1.42 as Rate Divergence and Trade Risks Weigh on Loonie, CIBC Forecasts
Summary
The Canadian dollar is projected to weaken through the end of 2026 due to diverging central bank policies and trade uncertainties, according to a new forecast from CIBC Capital Markets.
The Canadian dollar is poised for near-term weakness against its U.S. counterpart, with analysts at CIBC Capital Markets forecasting the USD/CAD exchange rate will average 1.42 in the fourth quarter of 2026. The bank attributes the pressure to a widening monetary policy gap between the U.S. and Canada, alongside persistent trade-related economic risks.
Diverging Central Bank Paths
The primary driver behind CIBC's bearish forecast is the expected divergence between the U.S. Federal Reserve and the Bank of Canada (BoC). CIBC anticipates the Fed will continue its monetary tightening cycle while the BoC holds its key interest rate steady for the remainder of the year.
This view contrasts with current market pricing that suggests a potential rate hike from the BoC, a move CIBC does not expect to materialize. A widening interest rate differential typically makes the U.S. dollar more attractive to investors seeking higher yields, placing downward pressure on the Canadian currency.
Trade Risks and Economic Headwinds
Compounding the currency's challenges are ongoing trade tensions with the United States. According to the CIBC report, these tensions are expected to create "economic slack," which could offset any inflationary pressures from higher oil prices.
AdThe bank projects this economic slowdown will be reflected in the labor market, forecasting Canada’s unemployment rate will rise to 6.6% in the fourth quarter of 2026.
A Brighter Outlook for 2027
CIBC's outlook for the Canadian dollar improves significantly heading into 2027. The bank’s base case assumes successful trade negotiations with the U.S. will lead to a broader agreement and a rollback of Section 338 tariffs, which would bolster Canadian economic growth.
This improved economic backdrop could allow the Bank of Canada to begin raising interest rates early next year. CIBC provided the following longer-term forecasts for the USD/CAD pair:
- Q1 2027: 1.39
- Mid-2027: 1.37
- Q4 2027: 1.35
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