Canadian Dollar: Range-bound outlook against US Dollar with growth gap – Societe Generale

Societe Generale’s Kit Juckes discusses USD/CAD in light of revised IMF growth forecasts, highlighting weaker prospects for Canada versus the US. He notes the widening North American growth gap and the role of two-year rate differentials in guiding the Canadian Dollar. Historical ranges suggest USD/CAD is likely to stay broadly confined, with significant downside needing improved Canadian fundamentals.

Canadian Dollar weighed by growth gap

"With the IMF’s US growth forecast revised up to 2.5% this year (while remaining at 2.1% in 2027), the North American growth gap is widening. The chart on the right shows relative Bloomberg consensus growth forecasts for 2027, but the IMF’s assessment (1.2% growth in Canada next year versus 2.1% in the US) is even less favourable for Canada. The chart on the left shows the two-year rate differential plotted against USD/CAD."

"Over the last decade, USD/CAD has traded within a 1.20-1.45 range, averaging 1.33. If IMF (or Bloomberg) growth forecasts are largely assumed to be priced into the current exchange rate, then the upside from here appears limited. That is certainly the impression given by the series of recent spikes, each followed by a relatively swift retracement."

"A significant decline in USD/CAD, however, will likely require a meaningful narrowing of the growth gap and, by extension, a substantial reduction in the interest rate differential."

"It is therefore reasonable to expect USD/CAD to remain within the 1.20-1.45 range over the next decade and to average modestly above 1.30, unless another major shock occurs."

"In the near term, the most reasonable conclusion may be that a great deal of bad news is already priced in. However, pushing USD/CAD below 1.35, for example, will likely require a catalyst in the form of improved geopolitical conditions or stronger Canadian economic data."