TD Securities strategists maintain a structurally bearish view on the US Dollar (USD) and a medium-term bias toward lower USD/CAD. They expect Fed easing in 2027, a high bar for further Bank of Canada (BoC) cuts, and improving Canadian terms of trade to support CAD. Their baseline sees USD/CAD drifting toward 1.34 by late 2026.

Medium-term bias favors stronger CAD

"Medium-term bias remains toward lower USDCAD. We maintain a structurally bearish view on the USD, particularly as its recent premium should fade alongside easing geopolitical risks, potentially reigniting the "hedge USD" trade. We expect Fed policy to transition toward easing in 2027 after a prolonged hold in 2026, while the bar for further BoC easing is high with policy already below neutral."

"Moreover, an improving Canadian outlook—supported by stronger terms of trade and the gradual pass-through of fiscal easing—should help stabilize the domestic backdrop, reinforcing a move toward lower USD/CAD levels through 2026."

"Further out, however, the long-term profile argues for lower USD/CAD levels by the end of 2026."

"Taken together, we continue to see the balance of risks skewing toward a gradual erosion in residual USD support, consistent with our forecast for USD/CAD to move toward 1.34 through 2026."

"In the worst case scenario 3 above where USMCA goes away, we expect meaningful CAD depreciation vs the USD and other G10 peers in the immediate aftermath. USD/CAD will likely breach and stay above 1.40 in that case. However, any lasting CAD weakness (above 1.42) even in that scenario is unlikely as the energy sector will likely still receive preferential treatment."

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