Canadian Dollar: Pressured near 1.40 against US Dollar – TD Securities

TD Securities’ FX team, led by Jayati Bharadwaj and Howard Du, argues that Canadian data still support patience from the Bank of Canada, keeping rate differentials in favour of the US Dollar. They expect USDCAD to remain supported above 1.40 near term, with a more CAD-friendly backdrop emerging in Q1 2027 as BoC tightening begins and the Canadian recovery strengthens.

CAD pressured by BoC expectations

"USD/CAD is likely to stay supported above 1.40 until a broadly bearish USD regime returns. We now look for 25bp hikes in Dec and Jan (prev: Jan and Mar)."

"A BoC hold, in line with our macro call, should disappoint market expectations and weigh on CAD. Even if the BoC were to hike at the October meeting, CAD rates curve pricing-in four BoC rate hikes over the course of a year is still too aggressive and has room to adjust in the dovish direction."

"With rate differentials remaining as the key driver of USD/CAD, we expect the relative-rates backdrop to remain USD-supportive near term, before turning more CAD-friendly in Q1 2027 as BoC tightening gets properly underway and the Canadian recovery gains traction."

"While USD/CAD has retraced from 1.43 due to hawkish BoC guidance amid stretched short CAD positioning, the pair is likely to stay supported above 1.40 in the near-term."

"Sustained USD/CAD downside requires both a more compelling BoC hiking story and the return of a broadly bearish USD regime. We think the latter is more likely after the US midterms, keeping us tactically bullish USD until then. Thereafter, renewed bearish USD impulses should help pull USD/CAD toward our 1.38 year-end target."

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