Synopsis:
RBC maintains a bearish long-term view on USD/CAD, with a 1.3500 target and risks skewed toward the low 1.3000s. While the pair has struggled to sustainably break above 1.37, RBC sees any rally toward 1.40 as a tactical opportunity to sell, supported by narrowing rate differentials, stable trade conditions, and changing hedging incentives.
Key Points:
Tactical vs. Strategic View:
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USD/CAD has tested 1.3700 multiple times since May but failed to sustain gains.
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RBC views upside moves toward 1.4000 as opportunities to re-enter shorts.
Long-Term Target and Bias:
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RBC holds a 6–12 month target of 1.3500, with downside risk to the low 1.3000s.
Drivers of the Bearish Bias:
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Narrowing Policy Gap:
Fed-BoC rate differential expected to shrink from +163bps to +38bps by end-2026, lowering USD hedging costs for Canadian investors. -
Trade Stability Assumption:
No reimposition of major tariffs on Canada assumed in baseline outlook. -
Changing Correlations:
USD/CAD’s historical negative correlation with US equities has weakened, reducing the incentive for Canadian investors to leave USD exposure unhedged.
Conclusion:
RBC remains strategically bearish on USD/CAD, favoring short positions on rallies toward 1.40. Structural drivers—narrowing rate spreads and weakening equity correlations—support a long-run drift lower toward 1.3500 or below.
