Key Takeaways
- The Canadian dollar is expected to strengthen over the coming year due to potential interest rate cuts by the Federal Reserve and reduced economic uncertainty from the review of the United States-Mexico-Canada Agreement (USMCA).
- The median forecast of 38 foreign exchange analysts predicts the Canadian dollar will edge 0.5% higher to 1.38 per U.S. dollar in three months and gain 2.7% to 1.35 in 12 months.
- The resolution of USMCA uncertainty and the Fed’s easing of interest rates are expected to contribute to a weakening of the USD-CAD exchange rate.
- Investors are watching the potential impact of increased Venezuelan oil exports to the United States on Canadian companies and trade negotiations.
Introduction to the Canadian Dollar Forecast
The Canadian dollar is expected to strengthen more than previously anticipated over the coming year, according to a Reuters poll of 38 foreign exchange analysts. The poll, conducted from January 5 to 7, found that the median forecast predicted the Canadian dollar would edge 0.5% higher to 1.38 per U.S. dollar, or 72.46 U.S. cents, in three months. This represents a slight increase from the previous forecast of 1.39. In 12 months, the currency is forecast to gain 2.7% to 1.35, compared to the previous expectation of 1.36.
Factors Contributing to the Canadian Dollar’s Strength
Several factors are expected to contribute to the Canadian dollar’s strengthening, including the potential for the Federal Reserve to cut interest rates and the review of the USMCA. Jayati Bharadwaj, a global FX strategist at TD Securities, noted that the Fed’s easing of interest rates, risk-on sentiment, broad USD weakness, and the resolution of USMCA uncertainty are all expected to encourage investors to become more optimistic about the Canadian dollar. The USMCA, which has shielded much of Canada’s exports from U.S. tariffs, is up for joint review in 2026, and a successful review is expected to reduce economic uncertainty and boost the Canadian dollar.
Impact of the USMCA Review and Venezuelan Oil Exports
The review of the USMCA is a significant factor in the Canadian dollar’s forecast, as it has the potential to impact Canada’s trade relationships with the United States and Mexico. Some investors are concerned that a boost in Venezuelan oil exports to the United States could hurt Canadian companies that sell similar heavy oil, weakening Canada’s hand in trade negotiations. However, Canadian Prime Minister Mark Carney has stated that Canadian crude is low-risk and will remain competitive even if output in Venezuela rises. Additionally, Carney has committed to spending billions of dollars on infrastructure and measures to raise productivity, which could provide a boost to Canada’s economy.
Monetary Policy and Interest Rates
The Bank of Canada’s monetary policy is also a key factor in the Canadian dollar’s forecast. Unlike the Federal Reserve, the Bank of Canada has signaled a possible end to its easing campaign after lowering the benchmark interest rate to a three-year low of 2.25%. Investors see a roughly 50% chance that the central bank will begin tightening by the end of 2026. This potential tightening of monetary policy could impact the Canadian dollar’s value, as higher interest rates can attract foreign investment and strengthen the currency.
Conclusion and Outlook
In conclusion, the Canadian dollar is expected to strengthen over the coming year due to a combination of factors, including the potential for interest rate cuts by the Federal Reserve and reduced economic uncertainty from the review of the USMCA. While there are concerns about the impact of increased Venezuelan oil exports on Canadian companies, Prime Minister Carney’s commitment to investing in infrastructure and productivity measures could provide a boost to the economy. As the Bank of Canada’s monetary policy and interest rates continue to evolve, investors will be watching closely to see how these factors impact the Canadian dollar’s value.