The US dollar is expected to weaken against the Canadian dollar through the rest of 2026, with USD/CAD potentially drifting toward 1.36, according to new analysis from ING. The forecast assumes oil prices stay above pre‑war levels and global risk sentiment continues to improve.
At the same time, some market participants see the pair largely confined to a broader 1.35–1.40 range amid conflicting forces from interest rates, energy prices and trade risk.
Fed easing expectations underpin weaker US dollar view
ING’s base case is built around the Federal Reserve resuming interest rate cuts in the third quarter of 2026. Looser US policy would narrow the rate advantage of the dollar over the Canadian currency and, in ING’s view, gradually pressure USD/CAD lower.
However, the interest-rate outlook has become more complicated. Markets have largely unwound roughly 60 basis points of Fed easing that had been priced into the 2026 curve after stronger‑than‑expected March nonfarm payrolls, which showed a gain of 178,000 jobs.
The Fed left its target range unchanged at 3.5% to 3.75% at its March meeting, with the effective rate around 3.64%. Policymakers still signal that rate reductions remain possible later this year, but the timing and scale are now less certain than earlier in the year.
Stronger US economic data and elevated US bond yields are seen as key supports preventing a sharper dollar slide and setting a floor under USD/CAD.
Canada faces softer domestic backdrop and trade uncertainty
On the Canadian side, the backdrop is less supportive. Analysts note that labor market concerns and the approaching joint review of the United States‑Mexico‑Canada Agreement (USMCA) are weighing on confidence.
The Bank of Canada held its policy rate at 2.25% at its March 18 meeting, pausing after 100 basis points of cuts last year. The decision reflects a “wait‑and‑see” stance as the economy shows signs of strain, including the loss of more than 100,000 full‑time jobs in the first two months of 2026. This presents a policy dilemma for Governor Tiff Macklem, who must balance weak domestic data against currency and inflation considerations.
Despite this softness, ING does not expect the Bank of Canada to raise borrowing costs this year, even though money markets are currently pricing in about 30 basis points of tightening by December.
Oil prices remain critical support for the loonie
Energy markets remain a central driver for the Canadian dollar. Higher crude prices are viewed as an important offset to Canada’s domestic economic uncertainty and lingering concerns about the labor market.
The US Energy Information Administration has sharply lifted its 2026 forecast for Brent crude, now expecting an average price of about $96 per barrel, with a peak near $115 in the second quarter before moderating. Spot prices are currently near $89.36 per barrel.
For Canada, a major oil exporter, sustained gains in crude prices tend to support the currency through improved terms of trade and stronger energy revenues. ING argues that if oil stays elevated and global financial conditions remain calm, the Canadian dollar could benefit in the near term, contributing to a gradual move in USD/CAD toward 1.36.
USMCA review looms as major medium‑term risk
A significant source of uncertainty is the mandatory joint review of the USMCA, scheduled for July. The process unfolds against a tense political backdrop and could lead to renegotiations or new tariff measures.
Any disruption would have direct implications for Canada, as 53% of its goods exports claimed preference under the agreement in 2025. Heightened trade tensions or changes in market access could weigh on Canadian growth expectations and, by extension, on the currency.
Analysts expect that as the review date approaches, trade headlines will become a more important driver for the Canadian dollar, potentially offsetting some of the support from strong energy prices.
Outlook: range trading likely amid conflicting forces
The overall environment points to a complex trading landscape rather than a straightforward trend. On one side, the prospect of Fed rate cuts and firm oil prices argues for a gradually stronger Canadian dollar. On the other, resilient US growth, higher US yields and the risk of trade frictions limit the scope for a sustained, one‑way move.
Several analysts therefore expect USD/CAD to spend much of the coming period trading between roughly 1.35 and 1.40, with episodes of volatility driven by incoming economic data, central bank signals, oil price swings and developments around the USMCA review.
In that framework, ING’s projection of a drift toward 1.36 is seen as a conditional scenario, contingent on continued improvement in global risk sentiment, stable or rising crude prices, and a clear turn toward easier US monetary policy in the second half of 2026.
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