USDCAD

21 August 2026, 14:17 UTC Chief Investment Office GWM Investment Research

USDCAD: Near-term support, medium-term decline CIO View: USDCAD Clémence Dumoncel, Strategist, UBS Switzerland AG Constantin Bolz, CFA, Strategist, UBS Switzerland AG

• Fed tightening expectations continue to fade, with markets pricing Global Asset Class Preference Neutral less than 25bps of additional hikes by year-end as inflation and labor market data soften. This has weighed on USDCAD since the Fed's CIO Forecast- USDCAD peak hawkishness in June. Negative long term trend

• The BoC remains one of the least likely to hike rates among major 21 Aug 26 1.38 PPP*: 1.32 central banks, given Canada's nascent economic recovery. Combined Dec 26 1.39 TEEER*: 1.26 with ongoing USMCA-related uncertainty, this should keep the Mar 27 1.38 Canadian dollar relatively weak and support USDCAD in the near Jun 27 1.36 term. Sep 27 1.36 • We lower our forecasts to 1.39 (from 1.42) for December 2026, Refinitiv, Macrobond, UBS calculation. *Purchasing Power 1.38 (1.40) in March 2027, and 1.36 (1.38) in June 2027, and add a Parity (PPP) is not a forecast per se, but a long-term September 2027 forecast of 1.36. equilibrium value for an exchange rate, calculated by UBS, TEEER refers to the 'trend-extrapolated equilibrium exchange rate', which is a three-year projection of the PPP. The window is closing on Fed tightening USDCAD’s rise earlier this year was driven by the widening divergence in policy expectations between the Federal Reserve and the Bank of Canada USDCAD has declined quickly as the (BoC). Since the Fed’s perceived hawkishness in June, however, the pair has market reassessed the Fed outlook Daily data declined rapidly as the case for policy tightening in the US has weakened. US inflation has moderated from its peak, while recent labor market data have softened. Markets now price in less than 25bps of Fed tightening by year-end, with marketing pricing for the probability of a September hike falling to around 30% at the time of writing. If the Fed remains on hold in September, expectations for a subsequent hike could fade further, particularly if inflation continues to ease in early 2027 and oil prices remain contained. At the same time, the US Treasury’s announcement this week that it would increase purchases of outstanding 10- to 30-year government bonds has put additional pressure on the pair.

A cautious BoC and domestic headwinds Despite our expectations that markets will gradually price out Fed tightening and inflation still hovering at 3% y/y in July, we believe the Source: UBS, Bloomberg, as of August 2026 Bank of Canada (BoC) remains the least likely among major central banks to raise rates since Canada’s economic recovery is still in its early stages. This means the Canadian dollar is a relatively low-yielding currency in an environment where yield differentials remain important. In addition, USMCA trade negotiations remain tense, creating lingering uncertainty for the Canadian growth outlook. We therefore continue to expect USDCAD to finish the year slightly higher at 1.39. Over the medium term, the pair should gradually move lower, supported by improving external conditions and targeted government measures aimed at boosting capital expenditure while maintaining fiscal discipline. However, the benefits of these policies

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are likely to take some time to materialize, limiting the downside potential USDCAD has been tracking rates for USDCAD. differential closely Investment considerations Daily data Prospects: We expect USDCAD to finish the year slightly higher at 1.39, and to fall to 1.36 in 2027 once the Fed resumes rate cuts. Boundaries: We would sell the pair above 1.40. To the downside, we expect 1.37 to act as support in the near term. Risk factors: An acceleration of the Canadian economy could bring down USDCAD faster than we expect. Fed rate hikes materializing against our expectations, a withdrawal of the US from the USMCA agreement, or a deterioration in global risk sentiment could push the pairing above 1.43.

Source: UBS…