TD Securities’ FX strategists Howard Du and Linda Cheng note that soft April Canada inflation and weak employment data should keep USD/CAD supported near 1.37 in Q2 2026. They argue BoC rate hike pricing for 2026 still has room to fall, with a more sustained USD/CAD downtrend only expected to develop in H2 2026 as Canadian data improve and USMCA risks ease.

USD/CAD stays supported before H2 downtrend

"April CPI surprised to the downside with inflation firming to 2.8% y/y as prices rose by 0.4% m/m, falling short of expectations (TD & market) for a larger acceleration to 3.1% y/y."

"The broad thaw across various core inflation measures alongside further improvement in measures of inflation breadth should allow the Bank of Canada to continue looking through the impact of higher energy prices at the June meeting."

"We expect USD/CAD to stay supported in the near-term and forecast the pair to be at 1.37 in Q2. Weak employment data and soft inflation data for April continue to suggest more sustained USD/CAD downtrend will only start to form in the second half of this year."

"The soft Canada inflation data further confirms our view that USD/CAD would stay supported on a 1.37-handle for the near-term. Near-term bearish drivers remain elusive for this pair, as we believe the BoC rate hike pricing for 2026 still has room to fall. We expect more sustained USD/CAD downtrend to form in H2 2026, when economic data for Canada show more decisive signs of improvements and USMCA uncertainty starts to wane."

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