Canadian Dollar Forecast for 2026
The Canadian dollar is projected to gain value against the U.S. dollar in 2026, potentially reaching 75 cents by year’s end. This outlook comes from economists and foreign exchange strategists who are focusing on the expected interest rate paths of the Bank of Canada and the Federal Reserve as important indicators amidst ongoing trade tensions.
The CAD/USD exchange rate has experienced a rocky start to 2026. In January, it dipped against its U.S. counterpart due to unexpectedly strong economic data from the U.S., raising expectations that the Fed might maintain long-term interest rates. Then, U.S. President Donald Trump stirred the pot with threats concerning Greenland and publicly challenging the Fed’s autonomy.
“The currency hit the levels we predicted by mid-year much sooner than anticipated,” noted Andrew Hensich, an economist at TD Bank, in a recent chat. “We still believe that a target of 74 to 75 cents by the year’s close is quite feasible.”
The Bank of Canada decided to keep its overnight interest rates steady at 2.25% during its January meeting, marking the second consecutive hold since December of the previous year. Their recent report highlighted the “unpredictable environment with little historical precedent,” and expressed challenges in forecasting the timing and direction of the next policy rate adjustment.
In 2025, the Fed cut U.S. interest rates three times. Analysts from major investment banks are split on what lies ahead. For instance, those at JPMorgan predict no rate changes until 2026, while colleagues at Bank of America and Morgan Stanley foresee two rate cuts this year.
“The Bank of Canada is maintaining its stance, while the Fed is likely to cut rates further,” Hensich explained. “This narrowing interest rate gap, especially at the short end, will encourage appreciation of the Canadian dollar.”
This assumption hinges on a “status quo” trade dynamic between Canada and the U.S. Essentially, it suggests that current tariffs on items like steel and aluminum will remain, although many goods will remain exempt under the Canada-U.S.-Mexico Free Trade Agreement.
He also remarked, “Things should gradually improve toward the year’s end as the interest rate differential tightens, and the economy maintains some upward momentum into 2025 and beyond.”
On Friday, the U.S. Supreme Court overturned a critical aspect of Trump’s protectionist trade approach. This anticipated ruling declared the president’s interpretation of emergency powers and associated tariffs unconstitutional.
“This ruling doesn’t remove the significant tariffs in place on automobiles, steel, aluminum, lumber, and some copper products, which are based on other factors like national security or perceived subsidies,” noted CIBC chief economist Avery Shenfeld in a research note. “Trump has lost a chunk of his tariffs, but he’s likely to push for replacements and defend his viewpoint.”
Earlier this week, BMO Economics called for a 75 basis point interest rate reduction from the Fed in 2025, along with an “extended pause” from the Bank of Canada.
“As Canada’s economy bounces back after being adversely affected by U.S. trade policies, we anticipate the Canadian dollar will keep rising to C$1.33 (US$0.752), which amounts to about 3.5% annual growth by the end of 2026, slightly outperforming the broader Canadian economy,” stated Deputy Chief Economist Michael Gregory in a research note.
CIBC Capital Markets believes the Canadian dollar will follow a similar path.
“Much of the recent strength in this rally has stemmed from the U.S. dollar losing favor among investors due to worries over geopolitical issues and trade arrangements,” the currency strategists pointed out.
“However, this rise might face challenges soon as attention shifts back to renegotiating the CUSMA trade agreement,” they added.
“We predict that USD/CAD will hover around the current levels, despite a sell-off in other U.S. dollar pairs. Yet, moving into the latter half of the year, improving global economic conditions and converging interest rates between the Fed and other central banks should push USD/CAD down to $1.34, close to what we consider a long-term stable level.”
