Key Takeaways
- The Canadian dollar’s prospects will likely improve in the second half of 2026, analysts say.
- Supportive government policies could fuel growth and provide a lift to the loonie.
- The US denial of trade renewal hasn’t significantly altered the outlook.
If the first half of 2026 marked an unexpected decline for the Canadian dollar, analysts are broadly optimistic about its prospects in the second half, expecting it to stage a rebound against the US dollar.
The Canadian dollar was trading at C$1.42 against the US dollar on June 30, sharply lower than this year’s strongest level of C$1.35, hit just a week after the Iran war broke out on Feb. 28. This represents a nearly 5% depreciation, driven in part by the US dollar’s relative strength. The Canadian currency struggled with a weakening economy and trade uncertainty while the US dollar surged on safe-haven buying and higher yields. Analysts say the Canadian dollar can only claw back its first-half losses against the US dollar if near-term risks dissipate. Those risks include Iran-war-driven concerns, the inflation trajectory, trade uncertainty, and US monetary policy.
Nick Rees, head of macro research at Monex, expects a stronger Canadian dollar in the second half of the year, with oil prices likely to remain elevated and easing tailwinds for the US dollar. “Geopolitical risk, which remains somewhat elevated, should continue to cool, while we remain skeptical around the prospect of [US] Fed rate hikes, anticipating that the Federal Open Market Committee will ultimately disappoint markets by staying on hold.” Any widening of the rate differential between the two central banks tends to drive the US dollar and dent the loonie.
The Loonie Bounces Back in the Second Half
While the Canadian currency has been depreciating so far this year, analysts remain optimistic about a second-half reversal. “Assuming [the trade deal] concludes with a little-changed agreement, then a boost to confidence should provide a tailwind to growth in the second half of 2026, enough to keep the Bank of Canada on hold and help the loonie claw back recent losses,” says Monex’s Rees. As of now, the trade agreement remains in its current form, though it’s entered a process of annual reviews after the US decided against a long-term renewal on July 1.
Noah Buffam of CIBC Capital Markets says the Canadian dollar could bounce back toward year-end after edging slightly lower over the near term. “We look for USD/CAD to peak at around C$1.43 and sell off toward C$1.37 by year-end,” he says. “This is because we expect the [US] Fed to remain on hold in the second half of the year, against market pricing for just over one hike.”
Meanwhile, the Bank of Canada is widely expected to remain on the sidelines for the remainder of the year, keeping a lid on the loonie-weakening rate differential.
Analysts have also remained concerned about trade uncertainty, citing it as a key risk to the health of the Canadian dollar. But Washington’s decision on July 1 to opt against a longer-term renewal of (as opposed to complete withdrawal from) the Canada-United States-Mexico Agreement is seen as the more favorable of the two undesirable outcomes for the loonie.
“It has been expected for months that this would be the result [of the trade negotiations],” says Buffam. “We expect an improving Canadian economy in the back half of the year to help the Canadian dollar rebound.”
Daniel Mitchell, managing director and senior portfolio manager of global fixed income and currencies at RBC Global Asset Management, expects the dollar to “revert to its well-worn C$1.35-C$1.40 trading range,” as US dollar strength fades. His optimism is further underpinned by the “positive economic impact of government policies that boost productivity and infrastructure and make Canada a more attractive investment destination for foreigners.”
Canadian Recession Could Keep the Loonie Weak
Alex Cohen, FX strategist at BofA Securities, remains one of the few skeptics, despite broader optimism for the loonie’s second-half prospects. He expects the Canadian dollar to continue to remain weak against the US dollar for the year. “Canadian economic data has been soft overall, and they recently entered a technical recession,” he says. “Inflation is relatively low, and the trend in job growth prior to last month has been soft. We anticipate that this malaise will continue.”
With oil prices retreating close to prewar levels, “the case for Bank of Canada hikes has diminished, and the Canadian dollar should remain under pressure as this unwinding process unfolds,” Cohen adds. An unwinding of trade occurs when investors sharply reduce their exposure to certain assets during market volatility. Cohen expects the loonie to fall to C$1.44 in the third quarter before drifting slightly higher to the current C$1.42 level around year-end or early next year.
Best- and Worst-Case Scenarios for the Canadian Dollar
CIBC’s Buffam has the Canadian dollar rising to C$1.34 by year-end as his best case. His worst-case scenario sees the loonie slumping to C$1.46.
In what is by far the most optimistic forecast, Tom Nakamura, head of fixed income and currencies at AGF Investments, says the loonie could soar as much as C$1.30. But a number of developments must align for this to materialize. “Best-case scenario would involve Iran tensions continuing to improve and passage through the Strait of Hormuz normalizes,” he says. Simultaneously, he wants to see “inflation pressures ease, bilateral trade talks leaving us with the status quo or slightly better terms,” and the US Fed easing its rate hike signals.
Meanwhile, RBC’s Mitchell’s bear scenario of further 3%-4% weakness toward C$1.47 “could be prompted by a further widening of interest rate differentials in favor of the US dollar.” He says this would be the Canadian dollar’s lowest level in a decade, including during the covid-19 pandemic and US President Donald Trump’s imposition of global tariffs in early 2025.
Mitchell’s bull case sees the loonie appreciating toward C$1.30 per US dollar (a more than 9% gain), provided there’s “a positive resolution to CUSMA trade negotiations to ease uncertainty that is holding back spending decisions by domestic and foreign investors, [and] the US Federal Reserve doesn’t raise interest rates at all.”
