CIBC Research discusses USD/CAD outlook and see the pair averaging 1.42 in Q4 before retracting towards 1.39 in Q1 of 2027.

'With the Federal Reserve pulling the trigger on hiking rates, the broad USD has been flying higher, leaving the CAD under pressure, along with other major currencies. And the Fed is set to follow up the September move with another hike in October, given inflation risks tied to still elevated oil prices. That will leave a wider interest rate differential with the BoC, as we don’t agree with the market pricing in a BoC hike this year. Any upside to headline inflation in Canada from elevated oil prices will be offset by the economic slack that has opened up as a result of trade tensions with the US, which is likely to push Canada’s unemployment rate up to 6.6% in the fourth quarter. That will leave CAD under pressure in the near term, with USDCAD likely averaging 1.42 in Q4 ‘26," CIBC notes.

"It’s likely that Trump will be more willing to make concessions for an Iran deal following the midterm elections, which could mean that the October hike will be the Fed's last for this cycle. We also expect trade negotiations with the US to result in the Section 338 tariffs on Canada being rolled back, and for a deal to be reached that avoids the tariffs that were threatened to come into effect in January. We are therefore more optimistic for the loonie in 2027, when prospects for an economic expansion tied to a trade deal with the US could prompt the BoC to hike rates early in the year. We see USDCAD reaching 1.37 by mid-2027," CIBC adds.