Wall Street Wagers on Weaker Canadian Dollar as Inflation Cools
Strategists at , and Nomura Holdings Inc. are piling up on bets that the Canadian dollar will decline further in 2026 as the country’s tame inflation readings have prompted a rethink of Bank of Canada’s interest-rate hike outlook.
The three banks are among others on Wall Street recommending trades favoring a weaker loonie against the US dollar. Deutsche and JPMorgan also advised clients to sell the Canadian dollar against the Australian and Mexican currencies.
“The Canadian dollar looks too strong versus the greenback relative to rate spreads,” Tim Baker , head of foreign-exchange research Americas at Deutsche Bank, said in an interview.
The Canadian economy has been losing jobs and is increasingly diverging from the US, where data show higher inflation and stronger job growth. That’s pointing to more weakness for the local currency, he said.
Baker expects the Canadian dollar to slide toward 1.41 against the US dollar over the next four months, a level last seen in November. The currency weakened Friday past its 200-day moving average at 1.3812 and ranked as the biggest Group of 10 loser this month, faring even worse than the Japanese yen.
The bearish outlook is underpinned by growing signals that Canada’s weak economic outlook makes it hard for policymakers to justify rate hikes. Data published this week showed the country’s inflation in April, as core measures climbed at the slowest pace since 2021.
On Friday, swaps markets were pricing about 40 basis points of Canadian rate hikes before the end of the year, compared with approximately 50 basis points a week earlier. Expectations had held steady over the past two months for two quarter-point hikes in 2026.
The market and the Bank of Canada are underestimating the risks to their outlooks, said Steve Englander , global head of G-10 FX research at
“Despite BOC’s focus on inflation, economic and financial risks are predominantly to the downside,” he said.
Englander expects the loonie will slide to 1.40 against the dollar by year-end, an approximately 1.4% decline from Friday’s level to a new year low.
Options traders also see further depreciation ahead. The premium of calls betting on the dollar-loonie exchange rate 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 0.10% in favor of calls on Friday, the most bearish level since April 7, when US President Donald Trump announced a ceasefire with Iran.
recommends traders hedge for the prospect of the dollar strengthening against the loonie over the next three months.
“We don’t see the BOC raising rates until 2027,” said Howard Du , a currency strategist at TD. “Market pricing for 2026 has more room to fall and should weigh on the Canadian dollar in the near-term.”
Nomura recommended Friday shorting the loonie at 1.38 per US dollar, targeting 1.4250 by the end of July, according to a client report penned by strategists Dominic Bunning and Yusuke Miyairi . With Canada’s core inflation measures sagging and the labor market still soft, “the BOC is unlikely to match market expectations for rate hikes over the next year,” they wrote.
“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 our strategic bearish bias on the Canadian dollar,” said Kunj Padh , an FX strategist at JPMorgan.