National Bank of Canada ’s (NBC) Stéfane Marion and Kyle Dahms describe the Canadian Dollar (CAD) as caught between improving domestic growth and a still-challenging external backdrop. USD/CAD recently rose above 1.42, with forecasts easing to 1.33 by Q2 2027. Lower Canadian inflation, weaker Gold and Oil, and lingering Canada-United States-Mexico Agreement (CUSMA) uncertainty cap near-term CAD upside, though pro-growth policy and trade clarity could support a stronger loonie in 2027.

Growth rebound but limited FX support

"Recession fears in Canada have abated, but the loonie still lacks near-term cyclical support. A projected Q2 rebound in GDP and resilient full-time employment are encouraging, yet lower gold and oil prices, subdued Canadian inflation and unresolved CUSMA uncertainty continue to restrain CAD upside. Still, sticky U.S. inflation and re-emerging supply-chain pressures give Washington an incentive to restore greater certainty around North American trade before the mid-term elections, reinforcing our view that a resolution can be reached by year-end."

"Combined with Ottawa’s most pro-growth policy agenda in more than a decade, this could help revive investment and set the stage for a stronger loonie in 2027."

"The Canadian dollar remains caught between improving domestic data and an external environment offering limited support. USD/CAD rose above 1.42 in June for the first time since spring 2025, when Washington unveiled sweeping tariffs on its trading partners."

"These developments improve the medium-term story for Canada. That said, the near-term cyclical backdrop for the loonie remains less supportive. Core inflation is markedly lower in Canada than in the U.S., reducing the likelihood that the Bank of Canada will follow the Fed in adopting a more restrictive policy bias."

"A meaningful appreciation phase will likely require some combination of a more dovish Fed repricing, stabilization in gold and oil, stronger Canadian growth, and greater clarity on the future of CUSMA. We still expect these conditions to fall into place by the end of 2026, setting the stage for a stronger loonie in 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)