Canadian Dollar: Policy divergence weighs on CAD against US Dollar – Rabobank

Rabobank strategists Molly Schwartz and Christian Lawrence note that the recent USD/CAD rally reflects broad US Dollar (USD) strength rather than specific Canadian Dollar (CAD) weakness, with the pair consolidating near 1.425 after failing to break 1.43. They expect policy divergence and a widening US-Canada rate differential to 200bp to push USD/CAD toward 1.45 over three months, before easing back toward 1.40 over a 12‑month horizon.

Rate differential seen driving pair higher

"After a spectacular CAD sell off which lasted the past month, from September 9 to October 5 USD/CAD is now trading sideways around 1.425, after failing to break above resistance at 1.43 on October 5, but still marking a dramatic retracement from September’s low of 1.373."

"Therefore, we are forecasting a marginally widening differential from 175bp now to 200bp by the end of this year, where we expect it to stay throughout 2026."

"We expect this policy divergence to push USD/CAD through the resistance trend line and make a run for 1.45."

"Given the widening differential, coupled with the potential for higher US yields post-US midterms, we see USD/CAD trading up to 1.45 on a three-month view."

"Therefore, despite weak economic activity, and a deteriorating trade dynamic with the US, the Canadian OIS curve is implying almost four more hikes from the Bank of Canada by September of next year."

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