National Bank of Canada’s (NBC) Marion and Dahms highlight a strong Canadian Dollar (CAD) rally in Q3, driven by positive data and higher Oil and Gold prices, which pushed USD/CAD briefly below 1.38. They warn that new U.S. tariffs and trade uncertainty raise downside risks to Canadian growth. The bank expects a near-term USD/CAD rebound toward 1.40 before a renewed move lower toward 1.33 by 2027.
Tariffs temper otherwise supportive backdrop
“The Canadian dollar has appreciated strongly so far in Q3, rebounding from a 19-month low reached at the end of June, when USD/CAD stood near 1.42. A string of positive economic surprises, firmer commodity prices and hopes for easing trade tensions pushed USD/CAD as low as 1.377 on August 21, before trade negotiations between Ottawa and Washington broke down. At the time of writing, USD/CAD is back above 1.38, but the loonie still retains a solid quarter-to-date gain of roughly 2.5% against the greenback, broadly consistent with the level we were forecasting at the start of the summer.”
“With tensions flaring up again in the Strait of Hormuz in August, market-implied odds of a return to normal by year-end have fallen below 30%, from more than 50% previously. That keeps a geopolitical risk premium embedded in both oil and gold, providing support for the Canadian dollar.”
“Against that backdrop, we believe the downside risks to growth warrant considerably more caution before contemplating another rate hike. In our view, such a move can—and should—wait until the economy is on firmer footing and trade risks have subsided, consistent with our previous forecast. If we are right, USD/CAD could retrace toward 1.40 in the coming weeks before the Canadian dollar resumes its appreciation, taking the pair toward 1.33 in 2027, assuming Canada-U.S. trade talks ultimately lead to a favourable outcome.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
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