Key Takeaways
- Most analysts forecast the Canadian dollar to strengthen against the US dollar in 2026.
- The loonie could find additional support from the Bank of Canada’s policy rate.
- Headwinds like the renewal of the USMCA trade agreement and lower oil prices could dampen the outlook.
2026 looks bright for the Canadian dollar, as analysts widely expect it to strengthen against the US dollar. This contrasts with a volatile 2025, which ended with relative strength for the loonie. Barring any setbacks in the renewal of the US-Mexico-Canada continental free-trade agreement, the Canadian dollar is poised to maintain that strength.
Analysts say the US Federal Reserve’s trend of lowering interest rates should reinforce the loonie. In contrast, trade-related risk and lower oil prices could stand to weaken the outlook. “We are looking for a stronger Canadian dollar in the year ahead,” says Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets.
Nick Rees, head of macro research at Monex Canada, expects the Bank of Canada’s monetary policy to continue supporting the Canadian dollar this year, “at least until the USMCA renegotiation comes into focus.”
The Canadian currency rose 5% against the US dollar in 2025 to C$1.37, or 72 US cents, even after briefly plummeting in April to a years-long low of C$1.46 after the first wave of tariff announcements. The loonie’s 2025 gains reversed a decline of 8% against the greenback in 2024.
What Drove the Canadian Dollar’s Surge?
Currency strategists point to the US dollar’s weakness as the primary source of the loonie’s rise last year. “The decline in the US dollar versus the Canadian dollar reflects the general weakness in the US dollar, mainly driven by a loss of confidence in US leadership following its imposition of import tariffs,” explains Thierry Wizman, global FX and rates strategist at Macquarie Group. He says that other trends, such as the resolution of political uncertainty and Prime Minister Mark Carney’s pro-growth policies, also helped.
CIBC’s Ying divides the year into before and after US President Donald Trump announced reciprocal tariffs on April 2. “Before ‘Liberation Day,’ tariff uncertainty drove USD/CAD higher, especially in early February, when Trump did not specify whether his tariffs included or excluded USMCA-compliant goods,” she says. “After Liberation Day, we saw the greenback weaken, primarily due to de-dollarization concerns.”
The Canadian dollar strengthened against the greenback in the second half of 2025, as “tariff and trade concerns have not been as severe as many had feared entering 2025, helping to relieve much of the downside pressure on the Canadian dollar,” Monex’s Rees says. However, any deterioration in the US-Canada trade dispute this year could renew pressure on the loonie.
A Growing Interest Rate Differential Should Benefit the Canadian Dollar
Late last year, the Bank of Canada paused its rate cuts while the US Fed’s easing cycle continued, helping to strengthen the loonie. In 2026, the Fed is expected to cut interest rates one or two more times. Should the Bank of Canada holds its overnight rate steady (as is broadly expected), that would widen the interest rate differential, providing additional heft for the Canadian dollar.
“We should see the Fed cutting rates more often than the Bank of Canada … we could potentially see a more divergence in currency returns at the benefit of the CAD,” says Sadiq Adatia, chief investment officer at BMO Global Asset Management. He highlights that “we expect CAD to appreciate in the first half, but in the second half, we could see USD bounce back a bit.”
Trade-Related Uncertainty Remains a Threat
Conditions remain supportive—at least until the USMCA comes up for negotiation, according to Rees. He calls it “the single biggest uncertainty facing USD/CAD in the coming year,” and says it will “likely weigh on sentiment and growth until greater clarity is obtained.” Though “the Trump Administration has toned down some of its initial hostility,” it is highly unlikely that “any negotiations will be a comfortable ride for the loonie.”
Despite this looming risk, Rees forecasts the Canadian dollar ending the year at C$1.30 against the US dollar for a rise of over 5% to match last year’s gains.
CIBC’s Ying also sees the Canadian dollar gaining value over the year, despite trade-related risks that could derail that outlook and “put the economy in an incredibly bad place.” She remains optimistic on trade. In addition, “peak tariff uncertainty has already passed, and final domestic demand is expected to recover into Q4 and early next year,” and “the Bank [of Canada] has explicitly told us that they think interest rates are about the right level.“ Ying’s projection puts the loonie at C$1.35 against the dollar by year-end, implying roughly half-cent gains each quarter.
Falling Oil Prices Could Weaken the Outlook
Macquarie’s Wizman forecasts the loonie to be at C$1.31 against the dollar by the end of 2026. A robust and growing trade relationship between the United States and Canada underpins this prediction, along with the Bank of Canada’s plan to pause rate cuts. However, he cautions that “an important risk remains Canada’s terms of trade, especially as determined by oil prices, which continue to do poorly and are acting as a drag on the Canadian dollar’s recovery.”
Oil prices fell 20% in 2025. This year, prices of global benchmark Brent crude have already slipped another 1% through midday on Jan. 6, following US forces capturing Venezuelan President Nicolas Maduro. Should prices fall further, that would spell trouble for the Canadian dollar, as lower oil prices erode export revenues and Canada’s terms of trade.
Economic Recovery Builds a Tailwind for the Canadian Dollar
Canada’s economic recovery—increasingly evident in the final economic reports of 2025—is expected to carry into 2026 as the trade outlook improves and government initiatives aimed at supporting growth gain traction.
“The Canadian economy is slowly recovering, and the next move from the Bank of Canada is likely to be a rate hike sometime in late 2026,” says CIBC’s Ying. She adds that a run of upside surprises in GDP and stronger-than-expected labor market data in the last three reports of 2025 point to firmer economic momentum. These developments could provide meaningful support for the Canadian dollar.
