Deutsche Bank and JPMorgan are piling up on wagers that the Canadian dollar will continue to fall in 2026 as the country's tame inflation readings fuel a rethink of the Bank of Canada's interest-rate hike outlook.
Both banks are recommending trades on a weaker loonie against the U.S. dollar. They are also recommending selling the Canadian dollar against the Australian and Mexican currencies.
Bearish Outlook on Loonie
Tim Baker, head of foreign-exchange research Americas at Deutsche Bank, said in an interview that the Canadian dollar looks too strong versus the greenback relative to rate spreads. The Canadian economy has been losing jobs, and the increasing divergence with U.S. data showing higher inflation and stronger job growth also point to a weaker loonie.
Baker expects the Canadian dollar to slide toward 1.41 over the next four months, a level last seen in November. The currency was trading at around 1.38 on Friday and ranked among the biggest Group of 10 losers this month, only faring better than the yen.
Other Banks' Views
Toronto-Dominion Bank recommends protections against a much higher dollar-loonie pair over the next three months, while Standard Chartered expects the Canadian currency to slide further before year-end, reaching a new 2026 low.
The bearish outlook is underpinned by an increasingly strong belief that a weak outlook makes it hard for policymakers to justify rate hikes. Canada released April inflation data on Tuesday, which rose less than forecast as core measures climbed at the slowest pace since 2021.
Howard Du, a currency strategist at TD, said they do not see the Bank of Canada raising rates until 2027. Market pricing for 2026 has more room to fall and should weigh on the Canadian dollar in the near term.
Options Market Signals
Options traders also see further depreciation ahead. The premium of calls betting on dollar-loonie to rise over puts looking for the pair to fall has kept widening over the past few days. One-month dollar-loonie risk reversals traded at 0.09 per cent in favour of calls on Friday, the most bearish level since April 7, when U.S. President Donald Trump announced a ceasefire with Iran.
On Friday, OIS markets are pricing nearly 40 basis points of Canadian hikes before year-end, compared with approximately 50 basis points a week ago. Expectations had held steady over the past two months for two quarter-point hikes in 2026.
Kunj Padh, an FX strategist at JPMorgan, noted that Canada has seen less of an inflation impulse in recent months compared to G-10 peers, and this week's data further reinforces that divergence and their strategic bearish bias on the Canadian dollar.
Steve Englander, global head of G-10 FX research at Standard Chartered, said the market and the Bank of Canada are under-estimating the risks to their outlooks. Despite the Bank of Canada's focus on inflation, economic and financial risks are predominantly to the downside. He forecasts that the loonie will slide to 1.40 by year-end, a more than 1.4 per cent decline from Friday's level and weaker than the year-to-date low at 1.3967.
