The Canadian dollar’s outlook has become more constructive, according to UBS strategist Patrick Ernst, who notes that recent shifts in U.S. trade policy have given the loonie some much-needed relief. While the macro environment remains challenging, UBS now sees USD/CAD gradually declining, targeting 1.36 by March 2026.
“Since the ’Liberation Day’ announcements, USDCAD has had a wild ride and now sits close to the level just before the US elections,” Ernst writes in a note co-authored with strategist Constantin Bolz. The pair had surged earlier this year as protectionist rhetoric out of Washington escalated, contributing to volatility for Canadian assets.
However, UBS sees a change in tone. “While the US administration’s initial tariff threats mainly targeted Canada and Mexico, its focus has shifted to other trading partners,” Ernst writes, adding, “we do not think that Canada is off the hook but acknowledge the latest relief.”
While near-term pressure has subsided, UBS remains cautious on longer-term risks, particularly surrounding industry-specific tariffs. “Substantial levies have already been imposed on certain industries, and additional sector-specific tariffs—such as those on lumber—are still looming,” according to Ernst. He warns, “it’s too early to call off the respective downside risks.”
Domestically, Canada’s own economic outlook remains fragile, with high interest rates pressuring household spending. “Elevated Bank of Canada policy rates for an extended period have taken their toll, and productivity growth has been lagging that of peers for some time,” Ernst notes. Still, UBS expects recent rate cuts to begin helping growth soon.
Political dynamics could also factor into currency performance. With Canadian federal elections approaching, the Liberal Party under new leader Mark Carney has regained momentum. “Should [Carney’s] fiscal plan…materialize, it could lift the CAD further over time,” says Ernst.
While UBS sees the USDCAD pair drifting lower, major levels remain in play. “The earlier 1.46 high remains the major resistance level, which we do not expect to break sustainably. Support sits around 1.35,” the note concludes. However, Ernst cautions that renewed trade friction or a broader economic downturn in the U.S. could still pose risks to both currencies.
