USD/CAD Price Annual Forecast: Further Loonie recovery on the cards for 2026?
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UPGRADE- Interest-rate differentials are expected to dominate as the Fed enters an extended rate-cutting period.
- The BoC has little room to cut further, further bolstering the Loonie.
- USMCA trade reviews could add volatility.
- Overall analyst expectations lean toward further USD/CAD downside through 2026, with eyes on 1.3500.
USD/CAD spent most of 2025 in a slow grind back down from two-decade highs after the US Dollar (USD) spent most of the year shedding weight across the board following a brief spat of bullish momentum at the start of the year. Now, with markets adapted to a new normal where tariffs spend most of their life cycle as an amorphous threat or a limited trade policy affecting less than 15% of total US-Canada trade, forex markets are poised to let rate differentials do the talking and drive Loonie markets.
What happened to the Canadian Dollar in 2025?
It was a year of extremes for the Canadian Dollar (CAD). The CAD kicked off 2025 with a spate of weakness against the US Dollar, driving the USD/CAD pair to its highest levels in over 20 years, hitting a generational high of 1.4793 in February. From there, the Loonie spent most of the second quarter gaining ground against the Greenback, climbing nearly 8.5% bottom-to-top and sending USD/CAD to its lowest levels since September the year before.
The second half of 2025 was marked by a slow grind back up the charts as the US Dollar Index (DXY) recovered its footing before three straight Federal Reserve (Fed) interest rate cuts finally caught up with the Greenback, pushing USD/CAD back down to the 1.3750 zone to wrap up the trading year.
With still-brewing US-Canada trade war tensions still working their way through the American-Canadian trade economy, macro is back in the driver’s seat heading into 2026. Diverging policy rates between the Fed and the Bank of Canada (BoC) are expected to surface. Analysts expect the Loonie to receive a boost from investor sentiment as the BoC finds itself in the bizarre position of having cut too much, too fast, leaving the Fed (and the Greenback by proxy) in the precarious position of having to face down an extended rate-cutting cycle over the next two years.
The commodity-sensitive Canadian Dollar caught some headwinds from declining Crude Oil markets in 2025. West Texas Intermediate (WTI) US Crude Oil prices wrapped up 2025 near $56 per barrel, down nearly 30% from the year’s peaks near $79.40 per barrel. With battered barrel bids limiting bullish momentum in 2025, CAD bidders could be facing a stronger-than-expected recovery through 2026. Energy markets are unlikely to continue letting oil prices slide further, and producers will be expected to stem the flow of overproduction in the face of eternally disappointing demand metrics.
Canadian Dollar 2026: Fed cuts to drain Greenback support and bolster Loonie
Central bank action will kick open the doors on 2026 for USD/CAD traders, with the Fed set to play an extended game of tug-of-war on interest rates while the BoC remains trapped under the weight of its own rate choices through 2025. The US Dollar is staring down the barrel of a long 2026, with the Greenback’s attractiveness to investors set to take a hit on the back of faster-than-expected rate cuts.
At the current cut, policymakers at the Fed expect a downright moderate pace of interest rate cuts looking forward. The Federal Open Market Committee (FOMC) called for a single quarter-point rate cut in 2026, with one more cut expected over the horizon in 2027. Rate traders were quick to kick sand over the Fed’s own rate projections in the latest dot plot, with rate markets pricing in nearly 90% odds that the Fed will be on pace to deliver a second rate cut as soon as September 2026.
Adding to the Fed’s rate call woes is the impending retirement of Fed Chair Jerome Powell, who will abdicate from his seat at the head of the Fed table next May. Powell was hand-picked by US President Donald Trump to head up the Fed during his first term, but has since pivoted into overwhelming dissatisfaction over his own selection. Trump spent much of the first year of his second term searching for a way to legally oust Powell early.
Donald Trump’s potential Fed Chair pick remains an ever-changing target. Still, markets overwhelmingly agree that whoever owns the shoulder that receives Trump’s tap will be far more friendly to the idea of fast-paced interest rate cuts than the overly-cautious Powell.
BoC wins by default after cutting too much, too fast
The BoC, which ran ahead of the Fed on the rate-cutting floor, has been left with little room to move further on interest rates. While a swift pace of rate trimming has left the BoC with limited capacity to head off recessionary pressures, depressed Canadian interest rates mean Loonie flows on rate differentials have only one direction to go as the Fed looks more likely to step up its pace of rate cuts.
Midyear trade deal renegotiations to add new frictions
The Trump administration will barrel into the joint review period for the US-Mexico-Canada (USMCA) trade deal in July of 2026, adding plenty of trade friction to the USD/CAD pair. Donald Trump, who personally oversaw the negotiation and implementation of the USMCA trade deal meant to replace NAFTA, consistently expressed dissatisfaction with his own bespoke trade agreement with the US’s closest trading partners throughout the first year of his second term. Trump is overwhelmingly expected to leave no table unturned during the mandatory review period at the six-year mark following the implementation of USMCA in July.
Between closing rate differentials potentially boosting Loonie markets by stepping on Greenback flows and trade war rhetoric heading into the midpoint of 2026 on the back of a messy USMCA trade review period, odds are tipped in favor of USD/CAD facing further downside through most of the year. Many analysts overwhelmingly expect an extended bullish Loonie push to force USD/CAD into the 1.3500 region by the end of 2026.
USD/CAD 2026 Technical Analysis: Rough road ahead to 1.3500
While the cards are certainly stacked in favor of a return to the 1.3500 region in 2026, a smooth ride is increasingly unlikely. Price action heading into the new year is poised for a sharp reversion to the mean as the 50-day Exponential Moving Average (EMA) sinks into a bearish cross with the 200-day EMA near 1.3900. The 1.3780 region has posed a tricky barrier for the USD/CAD to cross cleanly in previous years, and sits as stiff technical support just south of current bidding momentum.
Assuming a near-term leg higher doesn’t pierce the 1.3900 level meaningfully enough to spark an extended bullish reversal, price action is set for a fresh leg lower toward the back half of Q1, just in time for a period of political volatility before a bearish continuation into the 1.3500 neighborhood heading into the final quarters of 2026.
Final thoughts
Rate differentials and long-term technical momentum favor a continued Loonie recovery, and markets are banking on a slow USD/CAD return to 1.3500. May and June will be make-or-break months for USD/CAD trends, with the head of the Fed and USMCA both facing replacement by President Trump, who installed both during his first term. Present-day Donald Trump has a long-running history of coming to loggerheads with past Donald Trump, and that trend is set to continue in earnest as the sun rises on the second half of 2026.
USD/CAD Daily chart
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
- Interest-rate differentials are expected to dominate as the Fed enters an extended rate-cutting period.
- The BoC has little room to cut further, further bolstering the Loonie.
- USMCA trade reviews could add volatility.
- Overall analyst expectations lean toward further USD/CAD downside through 2026, with eyes on 1.3500.
USD/CAD spent most of 2025 in a slow grind back down from two-decade highs after the US Dollar (USD) spent most of the year shedding weight across the board following a brief spat of bullish momentum at the start of the year. Now, with markets adapted to a new normal where tariffs spend most of their life cycle as an amorphous threat or a limited trade policy affecting less than 15% of total US-Canada trade, forex markets are poised to let rate differentials do the talking and drive Loonie markets.
What happened to the Canadian Dollar in 2025?
It was a year of extremes for the Canadian Dollar (CAD). The CAD kicked off 2025 with a spate of weakness against the US Dollar, driving the USD/CAD pair to its highest levels in over 20 years, hitting a generational high of 1.4793 in February. From there, the Loonie spent most of the second quarter gaining ground against the Greenback, climbing nearly 8.5% bottom-to-top and sending USD/CAD to its lowest levels since September the year before.
The second half of 2025 was marked by a slow grind back up the charts as the US Dollar Index (DXY) recovered its footing before three straight Federal Reserve (Fed) interest rate cuts finally caught up with the Greenback, pushing USD/CAD back down to the 1.3750 zone to wrap up the trading year.
With still-brewing US-Canada trade war tensions still working their way through the American-Canadian trade economy, macro is back in the driver’s seat heading into 2026. Diverging policy rates between the Fed and the Bank of Canada (BoC) are expected to surface. Analysts expect the Loonie to receive a boost from investor sentiment as the BoC finds itself in the bizarre position of having cut too much, too fast, leaving the Fed (and the Greenback by proxy) in the precarious position of having to face down an extended rate-cutting cycle over the next two years.
The commodity-sensitive Canadian Dollar caught some headwinds from declining Crude Oil markets in 2025. West Texas Intermediate (WTI) US Crude Oil prices wrapped up 2025 near $56 per barrel, down nearly 30% from the year’s peaks near $79.40 per barrel. With battered barrel bids limiting bullish momentum in 2025, CAD bidders could be facing a stronger-than-expected recovery through 2026. Energy markets are unlikely to continue letting oil prices slide further, and producers will be expected to stem the flow of overproduction in the face of eternally disappointing demand metrics.
Canadian Dollar 2026: Fed cuts to drain Greenback support and bolster Loonie
Central bank action will kick open the doors on 2026 for USD/CAD traders, with the Fed set to play an extended game of tug-of-war on interest rates while the BoC remains trapped under the weight of its own rate choices through 2025. The US Dollar is staring down the barrel of a long 2026, with the Greenback’s attractiveness to investors set to take a hit on the back of faster-than-expected rate cuts.
At the current cut, policymakers at the Fed expect a downright moderate pace of interest rate cuts looking forward. The Federal Open Market Committee (FOMC) called for a single quarter-point rate cut in 2026, with one more cut expected over the horizon in 2027. Rate traders were quick to kick sand over the Fed’s own rate projections in the latest dot plot, with rate markets pricing in nearly 90% odds that the Fed will be on pace to deliver a second rate cut as soon as September 2026.
Adding to the Fed’s rate call woes is the impending retirement of Fed Chair Jerome Powell, who will abdicate from his seat at the head of the Fed table next May. Powell was hand-picked by US President Donald Trump to head up the Fed during his first term, but has since pivoted into overwhelming dissatisfaction over his own selection. Trump spent much of the first year of his second term searching for a way to legally oust Powell early.
Donald Trump’s potential Fed Chair pick remains an ever-changing target. Still, markets overwhelmingly agree that whoever owns the shoulder that receives Trump’s tap will be far more friendly to the idea of fast-paced interest rate cuts than the overly-cautious Powell.
BoC wins by default after cutting too much, too fast
The BoC, which ran ahead of the Fed on the rate-cutting floor, has been left with little room to move further on interest rates. While a swift pace of rate trimming has left the BoC with limited capacity to head off recessionary pressures, depressed Canadian interest rates mean Loonie flows on rate differentials have only one direction to go as the Fed looks more likely to step up its pace of rate cuts.
Midyear trade deal renegotiations to add new frictions
The Trump administration will barrel into the joint review period for the US-Mexico-Canada (USMCA) trade deal in July of 2026, adding plenty of trade friction to the USD/CAD pair. Donald Trump, who personally oversaw the negotiation and implementation of the USMCA trade deal meant to replace NAFTA, consistently expressed dissatisfaction with his own bespoke trade agreement with the US’s closest trading partners throughout the first year of his second term. Trump is overwhelmingly expected to leave no table unturned during the mandatory review period at the six-year mark following the implementation of USMCA in July.
Between closing rate differentials potentially boosting Loonie markets by stepping on Greenback flows and trade war rhetoric heading into the midpoint of 2026 on the back of a messy USMCA trade review period, odds are tipped in favor of USD/CAD facing further downside through most of the year. Many analysts overwhelmingly expect an extended bullish Loonie push to force USD/CAD into the 1.3500 region by the end of 2026.
USD/CAD 2026 Technical Analysis: Rough road ahead to 1.3500
While the cards are certainly stacked in favor of a return to the 1.3500 region in 2026, a smooth ride is increasingly unlikely. Price action heading into the new year is poised for a sharp reversion to the mean as the 50-day Exponential Moving Average (EMA) sinks into a bearish cross with the 200-day EMA near 1.3900. The 1.3780 region has posed a tricky barrier for the USD/CAD to cross cleanly in previous years, and sits as stiff technical support just south of current bidding momentum.
Assuming a near-term leg higher doesn’t pierce the 1.3900 level meaningfully enough to spark an extended bullish reversal, price action is set for a fresh leg lower toward the back half of Q1, just in time for a period of political volatility before a bearish continuation into the 1.3500 neighborhood heading into the final quarters of 2026.
Final thoughts
Rate differentials and long-term technical momentum favor a continued Loonie recovery, and markets are banking on a slow USD/CAD return to 1.3500. May and June will be make-or-break months for USD/CAD trends, with the head of the Fed and USMCA both facing replacement by President Trump, who installed both during his first term. Present-day Donald Trump has a long-running history of coming to loggerheads with past Donald Trump, and that trend is set to continue in earnest as the sun rises on the second half of 2026.
USD/CAD Daily chart
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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