After a year of significant volatility, the Canadian dollar is showing signs of a sustained recovery as it heads into 2026, buoyed by stronger-than-expected economic data and a shifting interest rate landscape with the United States.
Analysts Turn Bullish on Loonie's Prospects
Financial experts are revising their outlook for the Canadian currency, often called the loonie, following a series of positive economic indicators. Nick Rees, director of macro research at Monex Europe Ltd., noted a change in sentiment, stating his firm has become "slowly, but progressively, more positive on the Canadian dollar." This optimism stems from robust job creation in October and November and a surprisingly strong third-quarter GDP growth of 2.6 per cent annualized, which shattered forecasts of a mere 0.5 per cent.
Firm forecasts reflect this newfound confidence. Monex Europe projects the loonie will start 2026 around 72 cents U.S. and climb to approximately 75.9 cents U.S. by year's end. Similarly, CIBC's Fixed Income, Currency and Commodities team anticipates an entry point near 72.5 cents U.S., rising to about 74 cents U.S. over the course of the year. Bank of Nova Scotia's chief currency strategist, Shaun Osborne, sees the currency finishing 2026 at 75.1 cents U.S..
The Interest Rate Dynamic: A Key Driver for Recovery
A major factor behind the projected loonie strength is the anticipated path of U.S. monetary policy. Economists point out that a shrinking interest rate differential between Canada and the U.S. has historically provided a lift for the Canadian currency. Markets are currently betting that the U.S. Federal Reserve will implement two more rate cuts in 2026, following three reductions in 2025.
This expected easing by the Fed comes as the Bank of Canada has signaled comfort with its current benchmark rate, having already cut twice in the latter half of 2025. "The Canadian economy should continue to gain support at the margin from easing at the Fed," Rees explained, highlighting how U.S. policy moves will indirectly benefit the loonie.
Recapping a Tumultuous 2025 for the CAD
The road to this optimistic outlook was far from smooth. The Canadian dollar endured a rocky 2025, beginning with a plunge to a near-decade low of 68.8 cents U.S. early in the year. This drop was largely driven by fears over potential tariffs from the administration of U.S. President Donald Trump.
The currency then staged a dramatic 7.2 per cent rebound to a yearly high of 73.7 cents U.S. by June, as the U.S. dollar broadly weakened. However, the loonie surrendered some of those gains later in the year, dipping below 71 cents U.S. in early November as the Bank of Canada's rate cuts widened the gap with U.S. rates.
Despite the turbulence, the Canadian dollar has managed to claw its way back, currently showing a gain of approximately 4.7 per cent for the year against the U.S. dollar. As analysts look ahead, the consensus is building that more positive momentum is on the horizon for 2026, supported by a firmer domestic economy and favourable cross-border monetary policy trends.
