USDCAD is forecast to stay on a downward path through February 2026, even though a short-lived recovery may come into play for the pair at the start of the month.
The Bank of Canada (BoC) has firmly anchored its key rate at 2.25%. If truth be told, the regulator is widely expected to maintain this policy stasis throughout 2026, with major domestic banks (RBC, BMO, CIBC) declaring the easing cycle complete. Meanwhile, across the border, the Federal Reserve (Fed) is likely to deliver one or two rate cuts in 2026, which might gradually weigh on the US dollar as the year progresses (to summer). This monetary divergence reflects the banks' differing perceptions of economic risks and trade headwinds.
Key factors behind the split:
Commercial uncertainty as a brake. The BoC is currently navigating in the fog of USMCA enforcement and new US tariffs on key exports like steel and lumber. This trade overhang is a bottleneck for Canadian GDP (with modest 1.1% growth anticipated for 2026), forcing the central bank to keep rates low to cushion the economy.
Business activity with a huge gap. The American GDP proved to be more resilient, with expansion projected around 2.5%–2.8%, compared to Canada's subdued pace. This strength gives the Fed enough latitude to keep higher borrowing costs, thus preserving a powerful yield advantage for the greenback (around 1.25%–1.5%).
Inflation and labor dynamics in view. The maple leaf country is now dealing with economic slack and a softening labor market, which have kept inflation tame near the 2% target. In the Land of Liberty, the policy spotlight under incoming Fed Chair Kevin Warsh is now pivoting toward safeguarding employment stability amid the leadership transition.
What this means for USDCAD:
Traditionally, the interest rate differential has acted as a magnet for capital flows into US-denominated assets. However, the calculus is changing. The future policy path is the true north for currencies. The market is now baking in Fed rate cuts for 2026 against a stationary BoC—a recipe that sets the stage for a sustained, fundamental bid for the Canadian dollar.
Embedded in this forecast is a clear asymmetric risk: a hawkish shock from the new regulatory leadership. If Chair Kevin Warsh enters office prioritizing inflation containment over monetary easing, it would trigger a wholesale recalibration of expectations. This could potentially unleash a new wave of momentum for the US dollar against the loonie.
The ultimate recommendation is to sell USDCAD at 1.4060. Place Take Profit at 1.2970. Set Stop Loss at 1.4650.
Calculate your open position so that a potential loss (protected by a Stop Loss order) is limited to 1% of your deposit. If your account balance does not allow entering a position of this size, it is better to skip the trade and wait for other market signals that meet low-risk criteria.
This content is for informational purposes only and is not intended to be investing advice.
