-- Higher oil prices haven't provided lasting support for the Canadian dollar (CAD or loonie), amid escalating geopolitical and global economic risks, along with fading Federal Reserve rate cut prospects that have boosted the US dollar (USD), says Bank of Montreal (BMO).
Even markets continuing to price in Bank of Canada rate hikes have failed to provide lasting support, adds the bank, noting that from the close on Feb. 27, the Canadian dollar has weakened a net 1.5% to around $1.385 (US$0.722).
But, BMO says, as the U.S. dollar's boost from the Iranian conflict ebbs and Fed rate cuts resume, and with the BoC on a long pause, Canadian dollar prospects should improve.
The bank says it looks for the CAD to follow an appreciating trend to $1.33 (US$0.752) by the end of 2026 as the Canadian economy rebounds after being hit disproportionately by the United States trade policy.
Still, BMO adds, trade policy is a key risk for the Canadian dollar and the broader economy, with the review of the USMCA scheduled by July 1. BMO's working assumption is that the agreement won't be renewed and neither will any party give its six months' notice to exit.
Instead, BMO expects a sequence of annual negotiation intervals to commence, which could last for at least the next two or three years.
Meantime, while new Section 122 10% tariffs applied to USMCA noncompliant goods only, new national security or sectoral tariffs loom (Section 232) and Canada has been mentioned in the Section 301 investigations into unfair trade practices. The weight of U.S. trade policy on the loonie could mount "quickly," according to BMO.