TD Securities expects a broadly neutral near-term impact on the Canadian Dollar (CAD) from a more balanced Bank of Canada (BoC) tone. It says risks to Canada’s outlook now appear more two-sided, allowing the BoC to stay cautiously neutral without signalling imminent action.
With USD/CAD trading back near pre-conflict levels, TD expects the pair to be choppy and remain around current levels through Q2 2026. It links this to markets moving past peak geopolitical shock and uncertainty premia.
Near Term Cad Outlook
TD maintains a bearish view on the US dollar in 2026 and forecasts USD/CAD will drift lower in the second half of 2026. It projects the pair at 1.34 by year-end 2026.
TD also points to USMCA as an asymmetric risk for USD/CAD, describing a deal as more supportive for CAD sentiment and positioning than the absence of a deal. It expects USMCA-compliant goods to remain exempt from tariffs regardless of whether a deal is reached.
The Bank of Canada’s more balanced tone suggests a period of stability for the Canadian dollar in the near term. Recent inflation data for March 2026 came in at 2.9%, landing squarely within the central bank’s target range and supporting their decision to hold rates. This means we should prepare for the USD/CAD pair to trade within a familiar range over the coming weeks.
With USD/CAD currently holding around 1.3650, the market seems to have moved past the geopolitical shock we experienced earlier in the year. This environment favors strategies that profit from range-bound price action and declining volatility. We see this as an opportunity to sell options premium, such as through iron condors or strangles, expecting the pair to remain between roughly 1.35 and 1.38 through the second quarter.
Second Half 2026 Drivers
Looking further ahead, our overall view remains bearish for the U.S. dollar, which should eventually guide USD/CAD lower into the second half of 2026. A key catalyst will be the mandatory review of the USMCA trade agreement, with formal talks scheduled to begin in early July 2026. A successful resolution represents a significant potential upside for the CAD that is not fully priced in.
This outlook allows us to consider longer-term positions that will benefit from a strengthening Canadian dollar. While selling short-term options, we can also begin accumulating longer-dated USD/CAD put options with expirations in the fourth quarter. This provides a cost-effective way to position for a potential move toward our year-end target of 1.34.
This neutral stance is a clear shift from the more dovish commentary we heard from the Bank of Canada for much of 2025 and the beginning of this year. We believe the market has now returned to the trading levels seen before that period of heightened uncertainty. This reinforces the view that near-term price action will be choppy rather than directional.
