Analysts are cutting their forecasts for the Canadian dollar as renewed uncertainty over the Canada-United States-Mexico Agreement (CUSMA) diminishes the likelihood of interest rate hikes by the Bank of Canada. The loonie, which has already weakened against the U.S. dollar in recent weeks, faces additional downward pressure from trade policy risks and a hawkish U.S. Federal Reserve.
Forecast Revisions and Market Impact
Several major banks have revised their Canadian dollar projections downward, citing the unresolved CUSMA renegotiation and its dampening effect on the Bank of Canada's ability to raise rates. According to a Reuters poll published July 3, 2026, the median forecast for the Canadian dollar is now at 1.38 per U.S. dollar in three months, weaker than the previous estimate of 1.35.
Mark McCormick, chief FX strategist at BMO Capital Markets, noted in an interview with BNN Bloomberg that the hawkish stance of the U.S. Federal Reserve is also weighing on the Canadian dollar. "The Fed's aggressive tightening path is providing significant support to the greenback, while the Bank of Canada is constrained by trade uncertainties," McCormick said.
CUSMA Uncertainty and Rate Hike Prospects
The renegotiation of CUSMA, which began in 2025, has entered a critical phase with key disagreements over rules of origin for automotive products and digital trade provisions. The uncertainty has led economists to push back expectations for Bank of Canada rate hikes. Markets now price in only a 40% chance of a rate increase by the end of 2026, down from 65% in early June.
"The CUSMA uncertainty is a major headwind for the Canadian dollar," said Adam Button, chief currency analyst at ForexLive. "It reduces the Bank of Canada's confidence in the economic outlook and makes them more cautious about tightening monetary policy."
Broader Economic Context
The Canadian dollar's weakness comes amid mixed domestic economic data. Greater Toronto home sales rose 9.4% in June, according to the Toronto Regional Real Estate Board, which predicted price growth could accelerate. However, the housing market's resilience has not offset trade concerns.
Meanwhile, the Bank of Canada's next policy decision is scheduled for July 15. Analysts widely expect the central bank to hold its benchmark interest rate at 4.50%, with any move dependent on progress in CUSMA talks and inflation data. Canada's annual inflation rate stood at 2.8% in May, above the Bank's 2% target but within its control range.
Loonie Outlook and Risks
The Canadian dollar has depreciated 4.5% against the U.S. dollar so far in 2026, making it one of the worst-performing major currencies. Analysts warn that further downside risks remain if CUSMA negotiations stall or if the U.S. Federal Reserve maintains its hawkish posture.
"We see the Canadian dollar trading in a range of 1.37 to 1.42 over the next three months," said Jennifer Lee, senior economist at BMO Capital Markets. "A positive resolution on CUSMA could trigger a rebound, but for now, the risks are tilted to the downside."
Investors are closely watching the next round of CUSMA talks scheduled for late July. Any signs of progress could provide temporary relief for the loonie, but analysts caution that a comprehensive agreement may take months to finalize.
