TD Securities strategists maintain a structurally bearish outlook on the US Dollar (USD) and anticipate a medium-term bias toward a stronger Canadian Dollar (CAD), projecting USD/CAD to drift toward 1.34 by late 2026. This forecast is underpinned by expectations of Fed policy easing in 2027 after a prolonged hold in 2026, a high threshold for further Bank of Canada (BoC) cuts, and improving Canadian terms of trade, which are expected to stabilize the domestic economic backdrop and reinforce CAD strength [1].
TD Securities also highlights that recent ISM services data in the US exceeded expectations, registering at 54.5 due to increases in new orders and business activity, although employment remained in contraction. Despite this improvement, the ISM index is still well below pre-Covid norms. The Federal Reserve, according to statements from Fed's Williams, remains data-dependent and sees no immediate reason to alter interest rates, maintaining a cautious stance. US rates continued to rise following the announcement of additional proposed tariffs on 60 countries, and ADP employment data showed signs of labor market stabilization [2].
In terms of risk scenarios, TD Securities notes that if the USMCA trade agreement were to dissolve, CAD would likely depreciate significantly against the USD and other G10 currencies, with USD/CAD potentially breaching and staying above 1.40 in the immediate aftermath. However, sustained CAD weakness above 1.42 is considered unlikely due to anticipated preferential treatment for the energy sector [1].
Markets are expected to remain focused on geopolitical developments, including ongoing Iran negotiations, and upcoming US economic releases such as jobless claims and productivity data. Several Fed officials, including Barkin, Bowman, and Daly, are scheduled to speak ahead of the blackout period starting Friday night [2].
CONCLUSION
TD Securities projects a gradual strengthening of the Canadian Dollar against the US Dollar through 2026, supported by improving Canadian fundamentals and a cautious Fed stance. While US services data and rising rates provide near-term support for the USD, the medium-term outlook favors CAD appreciation unless major trade disruptions occur. Market attention remains on geopolitical events and upcoming US economic data releases.