The US Dollar to Canadian Dollar (USD/CAD) exchange rate traded just above 1.3750 following the latest Bank of Canada (BoC) policy decision.
Scotiabank expects one further rate cut by the central bank while forecasting a series of Federal Reserve cuts, which will narrow yield spreads and trigger fresh Canadian dollar gains.
The bank projects USD/CAD losses to 1.34 by the end of 2025 and further to 1.28 by the end of 2026.
Bank of Canada Policy Outlook
At its September 17th policy meeting, the BoC cut interest rates by 25 basis points to 2.50%, in line with consensus forecasts. Policymakers acknowledged ongoing risks from global tariffs and highlighted the high degree of uncertainty in the outlook.
Although the bank believes policy is now well calibrated, Scotiabank still expects another cut in October as an insurance measure against further weakness in economic activity, particularly after two months of disappointing employment data.
Despite this easing bias, Scotiabank remains concerned that inflation pressures may prove stubborn. It forecasts that the BoC will begin raising interest rates again in the second half of 2026 once inflation risks resurface.
Divergence With the Federal Reserve
In contrast, the Federal Reserve is expected to continue cutting rates throughout 2026. This divergence in central bank policy would support Canadian dollar strength, while political risks surrounding Fed independence could also contribute to sharper US dollar losses.
Multi-Asset Perspective
For traders and investors, this USD/CAD forecast underscores the importance of flexible forex trading strategies in adapting to shifting central bank dynamics. While currency moves remain in focus, many market participants are also diversifying into indices trading, monitoring the crypto market, and exploring crypto investment opportunities to hedge against volatility and policy-driven uncertainty.
