Canadian dollar seen correcting before uptrend resumes

In this photo illustration U.S. dollar and Canadian dollar banknotes. (Photo Illustration by Cezary Kowalski/SOPA Images/LightRocket via Getty Images)

The Canadian dollar is expected to give back some recent gains over the coming months, but the currency could then re-establish its uptrend if the Bank of Canada shifts to raising interest rates and the greenback faces broad-based selling pressures, according to a Reuters poll.

The median forecast of 35 foreign exchange analysts in the Jan. 30 to Feb. 4 poll predicted the Canadian dollar would weaken 0.9 per cent to 1.38 per U.S. dollar, or 72.46 U.S. cents, in three months, matching the forecast in a survey last month.

In 12 months, the loonie was expected to gain 1.3 oer cent to 1.35, also matching the previous forecast.

‘Corrective bounce’

“We are expecting a bit of a corrective bounce toward 1.3800 before the downtrend in our USD-CAD forecast profile resumes again,” said George Davis, chief technical strategist at RBC Capital Markets. “We see risks of BoC tightening potentially being brought forward from 2027 to H2 2026, which would provide some support to CAD.”

Last week, the Bank of Canada held its benchmark interest rate at 2.25 per cent and Governor Tiff Macklem said a high level of trade uncertainty made it difficult to predict when and how rates might next change. The Canada-United-States-Mexico Agreement (CUSMA) , which has shielded much of Canada’s exports from U.S. tariffs, is set for review by a July 1 deadline.

Investors expect no change in rates this year, but are leaning toward the next move being a hike, swap market data shows.

The loonie has strengthened 3.3 per cent from its low point in November.

“While investors may not want to exit their overweight U.S. holdings, worries over U.S. geopolitical and geoeconomics policy will see them hedge their USD exposure more actively in order to insulate themselves from further downside in the USD,” Davis said.

Dollar recovery expected to be short-lived

The U.S. dollar’s recent recovery will be short-lived, holding steady before resuming a broader decline later in the year, according to the same Reuters poll of currency strategists, as markets cling to interest rate cut expectations amid concerns about the Federal Reserve’s independence.

“Our year-end forecast for USD-CAD of 1.34, which was below market consensus, is likely to be met sooner rather than later,” Mirza Baig, a foreign exchange strategist at Desjardins, said in a note.

“When the U.S. is the source of macroeconomic shocks, it is difficult for the U.S. dollar to behave as a safe-haven currency. This means our confidence about the direction is high, but the precise magnitude and speed of the move is harder to predict.”

(Reporting by Fergal Smith; Polling by Indradip Ghosh and Nushaiba Iqbal; Editing by Alex Richardson)