Title: Gradual USD/CAD Weakness Expected Through 2026: CIBC Outlook and RBC Perspective
Author: Adapted from the original article by MarketScreener
The outlook for the USD/CAD currency pair comes under the spotlight as top Canadian financial institutions release new forecasts on its likely performance over the next two years. According to recent commentary from CIBC Capital Markets and RBC Capital Markets, the Canadian dollar (CAD) is poised to appreciate modestly against the U.S. dollar (USD) through 2026, though this path will not be linear. While CIBC takes a moderately bearish view of the U.S. dollar relative to the Canadian counterpart, RBC expects trading within a defined range as economic and monetary policy drivers offset each other.
As global central banks begin to diverge in their rate paths and Canada’s trade balance subtly shifts, the USD/CAD pair is expected to reflect both macroeconomic fundamentals and short-term technical factors. This extended look dives into what Canada’s largest banks see ahead for the loonie, evaluates policy expectations from the Federal Reserve and the Bank of Canada (BoC), and summarizes key factors influencing the trajectory of the currency pair.
Key Takeaways:
– CIBC Capital Markets projects USD/CAD to gradually decline through to 2026
– RBC Capital Markets forecasts a more range-bound movement in the near term
– Divergence in monetary policy, oil prices, trade balances, and economic growth are major drivers
– Market anticipates potential rate cuts in both Canada and the United States over the next 12 months
– Structural factors such as productivity and current account balances remain supportive of CAD in the long run
CIBC Sees Long-Term Downward Trend for USD/CAD
CIBC economists anticipate a soft weakening of the U.S. dollar against the Canadian dollar over the coming quarters, building on slight undervaluation in the loonie. According to CIBC’s most recent FX outlook, the USD/CAD exchange rate is forecasted to ease progressively into 2026, driven by macroeconomic normalization, expected interest rate paths, and broader sentiment within the foreign exchange market.
Key Drivers for USD/CAD Weakness According to CIBC:
– The U.S. dollar is currently seen as overvalued when measured against longer-term purchasing power parity (PPP) metrics. As cyclical drivers normalize, downward pressure may return to the USD.
– Any easing cycle that emerges from the Federal Reserve may exert downward pressure on the USD and support CAD appreciation.
– Oil prices, while volatile, are likely to support the Canadian dollar, particularly if global demand stabilizes and production cuts by OPEC+ continue.
– Canada’s current account is in healthier standing than it has been in previous downturns, partly due to energy exports and improved trade terms.
According to CIBC, their base-case forecast envisions USD/CAD descending below 1.30 by early 2025 and approaching 1.25 by early 2026. Current exchange rates hover around 1.37, suggesting room for a roughly 8-10% move lower over a multi-year horizon.
CIBC on Interest Rates and Monetary Policy:
– The Bank of Canada is expected to initiate rate cuts in mid-2024, following a peak overnight rate of 5%.
– The Federal Reserve’s policy trajectory suggests a slow easing path into 2025, unless inflation softens more quickly than current models anticipate.
– CIBC believes the BoC and the Fed may maintain a near-similar terminal rate by 2026, but the path of getting there could cause interim currency volatility.
RBC Capital Markets: Range-Bound Expectations Short-to-Medium Term
While CIBC leans towards modest loonie strength, RBC Capital Markets takes a more cautious stance for the short and medium-term horizon. RBC currency strategists expect the USD/CAD pair to trade within a narrow range in coming months, citing data alignment between the two economies and muted interest rate differentials.
Read more on USD/CAD trading.