TD Securities expects the Bank of Canada (BoC) to remain data dependent throughout the ongoing USMCA review, despite prevailing trade uncertainty. The firm projects the next BoC rate hike for Q1 2027, while the US Federal Reserve is shifting toward easing. TD Securities notes that trade risks are unlikely to materially alter the BoC's current rate-hike timeline under most scenarios, with a high bar for USMCA extension to impact monetary policy. They emphasize that the BoC is likely to take a wait-and-see approach to USMCA negotiations, assessing growth impacts, fiscal offsets, and the risk of de-escalation before making any policy changes. Even if USMCA negotiations deteriorate, TD expects the BoC to remain patient, as recent Canadian economic data has been weak and headline CPI is near 3%, with excess supply and softer core inflation also influencing the central bank's stance. TD Securities further argues that trade uncertainty is not the sole factor constraining business investment, and unless higher energy prices spill over into broader inflation, the BoC can afford to stay patient. However, if inflation expectations rise due to energy prices, trade uncertainty may not be enough to keep the BoC on hold through 2026. The evolution of the output gap, core inflation, and inflation expectations will drive the timeline for rate hikes [1].
Meanwhile, Scotiabank reports that the Canadian Dollar (CAD) has slipped below 1.39 against the US Dollar (USD), pressured by weak domestic economic data and stronger US figures. This has widened rate spreads in favor of the USD, contributing to the CAD's undervaluation relative to Scotiabank's short-term equilibrium estimate of 1.3689. The analyst team notes that weak fundamentals and lingering trade uncertainty mean the CAD is currently driven by external developments, with technicals indicating vulnerability toward the late-March high of 1.3967. Although intraday price signals suggest some minor relief for the CAD, the USD's push above the mid-1.38 area leaves the CAD exposed to further losses. Historically, the USD has struggled to hold above 1.39 for more than a week, often followed by a swift CAD recovery, with intraday support at 1.3860/70 [2].
Both sources highlight the impact of weak Canadian economic data and trade uncertainty on monetary policy and currency movements. While TD Securities sees the BoC maintaining a cautious, data-driven approach, Scotiabank underscores the CAD's vulnerability to external factors and technical resistance levels.
CONCLUSION
The Bank of Canada is expected to remain patient and data dependent amid USMCA uncertainty, with rate hikes unlikely before Q1 2027. Weak domestic fundamentals and trade risks have pressured the Canadian Dollar, leaving it vulnerable to further losses against the US Dollar. Market participants should monitor economic data and USMCA developments for potential shifts in policy or currency direction.