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CIBC Sees Gradual Appreciation of Canadian Dollar, but US Tariffs Add Uncertainty

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CIBC Capital Markets maintains its forecast for a gradual strengthening of the Canadian dollar, supported by a broader US dollar pullback as markets reduce expectations for further US rate hikes.

Stronger Canadian growth in 2027, alongside slower population growth keeping potential growth constrained, is expected to narrow the output gap and allow the Bank of Canada to gradually return its overnight rate to its 2.75% neutral estimate, wrote CIBC in a Tuesday note.

"But relative to a month ago, that forecast for Canadian dollar appreciation comes with some significant new uncertainties, particularly for the next few months," wrote the bank's economists in the note.

The forecast partly relies on a slowdown in fuel price inflation that allows the Federal Reserve to maintain a wait-and-see approach rather than resume tightening, a scenario that could be challenged if tensions in the Middle East escalate further.

Additional US tariffs on Canadian goods present a new downside risk, added the bank. While the 30-day delay to Aug. 19 has accelerated trade negotiations between the US and Canada, and CIBC expects talks to ease some tariff threats, the range of possible outcomes remains wide, adding uncertainty to the Canadian dollar outlook.

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