Canadian dollar faces near-term pressure as rate gap and trade risks widen

The Canadian dollar may face short-term pressure according to CIBC Capital Markets, anticipating the Federal Reserve to maintain higher rates while the Bank of Canada holds steady. CIBC predicts USD/CAD will average 1.42 throughout the fourth quarter of 2026. The bank does not foresee the BoC following the market's expectations for a rate increase this year.

Meanwhile, rising oil prices could boost Canadian headline inflation, but CIBC anticipates this impact to be countered by economic slack resulting from trade tensions with the United States. They project Canada's unemployment rate climbing to 6.6% by the end of the year. The outlook brightens in 2027, as CIBC anticipates U.S.-Canada negotiations to result in the repeal of Section 338 tariffs and a comprehensive trade deal.

This could stimulate economic growth and permit the BoC to initiate rate hikes early next year. CIBC's broader foreign exchange forecast anticipates USD/CAD to be 1.37 by mid-2027, dipping to 1.39 in Q1 2027 and 1.35 by the end of 2027.