The Canadian dollar is facing head winds in the near term as a widening interest-rate gap with the United States and ongoing trade uncertainties weigh on the currency, according to analysts at CIBC Capital Markets.
CIBC projects the USD/CAD exchange rate will average around 1.42 in the fourth quarter of 2026, reflecting continued pressure on the loonie. The bank expects modest recovery later, forecasting the pair to slip to 1.39 in the first quarter of 2027 and further to 1.37 by mid-year, eventually settling at 1.35 in Q4 2027.
The primary driver is diverging monetary-policy expectations. CIBC anticipates the Federal Reserve will continue tightening, while the Bank of Canada is likely to hold rates steady this year. The bank said it does not expect the BoC to follow market pricing for a rate hike this cycle.
On the macro front, Canada's unemployment rate is forecast to rise to 6.6% by the fourth quarter, signaling growing economic slack. While higher oil prices could boost headline inflation readings, CIBC expects that upside to be largely offset by the drag from U.S.-Canada trade tensions.
Looking further ahead, CIBC anticipates that negotiations with Washington will result in a rollback of Section 338 tariffs and a broader trade agreement in 2027. If achieved, that could pave the way for the Bank of Canada to raise rates as early as next year, providing a tailwind for the loonie and supporting the bank's forecast for a stronger CAD later in the period.
