ING expects USD/CAD to edge lower into year-end, mainly due to anticipated US Dollar weakness if the Federal Reserve resumes rate cuts in 3Q. The view assumes the main support for the Canadian dollar comes from US monetary policy rather than Canada’s domestic conditions.
Canada’s outlook is described as less supportive, with the Bank of Canada focused on upcoming USMCA negotiations and possible effects on jobs. ING states it does not expect the Bank of Canada to raise rates, despite markets pricing about 30bp of tightening by year-end.
ING sets out a scenario where oil remains above pre-war levels while de-escalation lifts global risk sentiment. Under those conditions, ING sees USD/CAD returning to 1.36 before USMCA-related risks increase.
The article notes it was produced with the help of an AI tool and reviewed by an editor.
Looking back, our view from last year that the US dollar would weaken after the Fed started cutting rates proved correct, as we saw happen in the third quarter of 2025. That move pushed USD/CAD down temporarily, but the pair has since drifted higher. Now, with the pair trading around 1.3750, the story has become more complicated.
The main driver has shifted from a clear Fed easing cycle to policy uncertainty on both sides of the border. Recent US inflation data, like the March CPI which came in at a stubborn 3.1%, has forced the Fed to pause and signal a data-dependent approach. Meanwhile, Canada’s latest Labour Force Survey showed job growth of only 15,000, fueling speculation the Bank of Canada may have to cut rates before the Fed.
Oil prices are providing some support for the loonie, with WTI crude holding firm near $88 per barrel, well above pre-2022 levels. This should theoretically be pushing USD/CAD lower. However, this strength is being cancelled out by growing concerns over the Canadian domestic economy.
The upcoming USMCA trade agreement review, scheduled for July 2026, is now the biggest risk on the horizon. We are seeing increased political noise from Washington, creating serious uncertainty for Canadian exports and investment. This is making traders nervous about holding long Canadian dollar positions.
For derivative traders, this environment suggests buying call options on USD/CAD with a strike price around 1.3900 expiring in the next two months. This strategy allows for profiting from a potential spike higher driven by negative USMCA headlines or a weak Canadian economic print. The risk is limited to the premium paid for the options if the pair unexpectedly falls.
Given the conflicting signals, implied volatility is also likely to rise as we approach the trade review. Another strategy is to purchase a long straddle, buying both a call and a put option at the same strike price. This position profits from a large price move in either direction, capitalizing on the rising uncertainty itself.
