Canadian Dollar Forecast: Loonie Gains as Softer Core Inflation Tests Rate Bets
The Canadian Dollar has strengthened, but CIBC eyes renewed pressure if the Fed raises rates while softer domestic inflation lets the BoC hold.
The Canadian Dollar extended its recovery on Tuesday, pushing the US Dollar-to-Canadian Dollar exchange rate down to around C$1.4076, almost 1% below its level five trading days earlier.
Dollar to Canadian Dollar (USD/CAD): 1.40553 (-0.36%)
Euro to Canadian Dollar (EUR/CAD): 1.576396 (-0.34%)
Monday’s inflation figures give the Bank of Canada room to resist following the Federal Reserve into further tightening, however, leaving an important source of potential support for the Loonie uncertain.
CIBC had warned before the release that the currency could weaken again if Canadian and US interest rates diverged.
ING separately expects USD/CAD to reach 1.42 at both end-October and end-2026, despite acknowledging that a Canadian rate increase in December is possible.
Higher petrol prices mask softer underlying inflation
Canada’s September CPI release showed annual inflation rising to 3.1%, slightly below CIBC’s 3.2% forecast.
But inflation excluding gasoline slowed to 2.2% from 2.4%, and the Bank of Canada’s median and trimmed measures eased to 1.9% and 1.8% respectively.
Those results fit the distinction CIBC economist Andrew Grantham drew before the release: “While headline inflation likely accelerated further in September, if core measures of inflation remain close to 2%, that would support another hold on interest rates from the Bank of Canada, particularly with recent data suggesting that economic growth was faltering again after US tariffs came into effect in late August.”
Higher energy costs are lifting the price index without the same breadth of pressure in the underlying measures, making a rate increase less straightforward than the headline number suggests.
That could leave Canadian assets at a yield disadvantage if US rates rise further.
CIBC’s Avery Shenfeld writes: “If the Fed ends up hiking in October or December while the BoC pauses, we could see another dip ahead.”
Why the Bank of Canada could accept a weaker Loonie
A falling currency raises import costs, but Shenfeld argues that the policy response depends on why it is falling and how persistent the resulting inflation becomes.
“To the extent that the Fed is facing a greater inflation threat than the Bank, the latter can opt to tolerate a leaking loonie’s impact on prices, particularly if it sees it as a one-off lift to the price level and not a trigger for a broader inflation upturn.”
The recent narrowing of US-Canadian yield spreads helped the Loonie’s recovery, making renewed divergence a direct challenge to that support.
Shenfeld also questions how much protection a cheaper currency would offer exporters facing tariffs.
“Remember that for many manufacturers, while labour is priced in Canadian dollars, many of their other inputs are sourced at world prices in US dollars, so there’s no cost reduction on those items versus US competitors associated with a weaker C$.”
Lower Canadian labour costs in US Dollar terms cannot offset every tariff or imported component, limiting the growth benefit from depreciation.
The BoC’s latest business survey illustrates the policy difficulty.
Its overall improvement in sentiment largely reflected interviews conducted before the breakdown in Canada-US trade talks, while later responses showed weaker export and investment expectations alongside renewed inflation concerns.
The same trade shock can therefore weaken demand and raise costs, pulling the case for interest rates in opposing directions.
ING sees limited currency reward from a December hike
ING’s Francesco Pesole allows for a more defensive policy response: “Still, with growth proving resilient and a widening rate spread with the Fed, an (insurance) rate hike in December by the Bank of Canada remains a clear possibility.”
In its pre-release assessment, ING recorded a December increase as fully priced by markets, with some tightening also allowed for at the October meeting.
That limits the scope for a routine confirmation of December tightening to surprise investors in the Canadian Dollar’s favour.
Pesole’s currency conclusion was unchanged: “We don’t see much more downside for USD/CAD at this stage, with a return to 1.420 still our baseline for the month-end and year-end.”
CIBC sees greater pressure to tighten if broad-based US Dollar strength persists, especially if the energy shock remains unresolved.
Shenfeld writes: “A weaker Canadian dollar that arose from an extended climb for the US dollar against the broad pack of the other major currencies would be the one case where the added inflation pressures, particularly if there were no resolution of the oil supply shock, would compel the Bank of Canada to take a more aggressive line on interest rate hikes.”
USD/CAD Exchange Rate FAQ
What is ING’s USD/CAD exchange rate forecast?
ING expects 1.42 at both the end of October and end-2026, implying some reversal of the Canadian Dollar’s recent gains.
Does higher Canadian inflation guarantee a rate rise?
No. September’s headline acceleration came alongside softer core measures, while the business survey showed continuing risks from energy and trade costs.
Does CIBC give a Canadian Dollar target here?
No. Its warning is conditional on US and Canadian policy diverging, rather than a numerical exchange-rate projection.
