Canadian Dollar extends gains on hawkish BoC message, softer US Dollar

TORONTO, September 3 — Canada's dollar is projected to decline in the coming months before modestly increasing in the coming year, should a resolution be achieved in the trade conflict with the United States, according to a Reuters poll.

The median forecast among 32 foreign exchange analysts surveyed from August 31 to September 2 anticipates the Canadian dollar to dip 0.4% to 1.39 per U.S. dollar, or 71.94 U.S. cents, within three months, as compared to a 1.40 forecast in a survey the previous month. Over a year's time, the Canadian currency is expected to rise 1.8% to 1.36, in contrast to the previous forecast of 1.3660.

While the analysts are cautious about the short-term performance of the loonie, they believe that many of the current factors adversely affecting the Canadian dollar will dissipate, according to Nick Rees, head of macro research at Monex Europe. Trade tensions with the U.S. are anticipated to be resolved through a deal, irrespective of the current posturing, enabling domestic macro data to recover.

Earlier this month, the U.S. implemented new 50% tariffs on at least $20 billion worth of imports from Canada following the collapse of talks between the two nations. The Bank of Canada stated on Wednesday that it does not expect the tariffs to have a significant direct impact on the economy, maintaining its benchmark interest rate at 2.25%. The central bank also mentioned that the ongoing Middle East conflict has raised upside risks to the inflation outlook.

Monex Europe anticipates a slight strengthening of the Canadian dollar to 1.35 by the end of the following year, based on the narrowing gap between U.S. and Canadian interest rates and the anticipated acceleration of investment spending in Canada. Investors expect around 100 basis points of tightening from the Bank of Canada by the end of 2027, which would bring the policy rate closer to the upper range of the central bank's estimated neutral interest rate — a rate where borrowing costs neither hinder nor propel the economy.