Scotiabank continues to expect broad-based weakness for the U.S. dollar (USD) against all of the major developed economy currencies, supporting its outlook for a stronger Canadian dollar (CAD).
The divergence in policy rate paths remains a core pillar of its fundamental outlook, the bank said in its latest foreign exchange outlook, adding that the USD outlook remains weak through the second half of 2026 and into the end of our forecast horizon at the end of 2027.
Meanwhile, CAD continues to make "halting progress" toward Scotiabank's forecast targets as it continues to retrace its 2024-2025 decline.
CAD made a fresh cycle high in early January, only to relinquish its early gains in the initial weeks of the US/Iran conflict that began in early March, said Eric Theoret, associate director for global foreign exchange at Scotiabank.
"The CAD's recent gains have delivered a meaningful narrowing in the discount (USDCAD premium) to our fair value estimate. Fundamentals argue for a stronger CAD, and we anticipate medium-term strength as markets shake off their conflict-related concerns,"
"The Bank of Canada forecast is also directionally unchanged, however the 75bps of cumulative tightening have been pulled forward into 2026 while leaving the terminal rate unchanged at 3.00%. Our USDCAD forecast is unchanged, and we continue to target 1.33 by the end of 2026 and 1.30 by the end of 2027," added Theoret.
However, Scotiabank maintained that trade policy uncertainty remains a major risk into the July 1 review of the USMCA.