The recent moves in the Canadian dollar have tracked the swings in US sentiment. Net of the short-lived US credit market concerns, the USD rally has dominated G10 FX so far in October, and the loonie is understandably doing better than other majors (euro, pound, antipodeans) given its smaller negative correlation to US dollar strength.
But moving on, we still expect the macro picture in the US to deteriorate, with jobs market and inflation numbers pointing to more Fed cuts beyond the three currently priced in by March 2026. That should pair with BoC easing in placing CAD in an unfavourable position against any other G10 currency outside of the USD.
USD/CAD is around 2.5% overvalued relative to our short-term fair value, and we do expect a return to 1.38 by year-end, primarily driven by USD weakness. But given our call for an October BoC cut and the fact that markets will probably feel little restraint to price in another cut should data justify it, we think it will be a slow decline, with some potential bumps to 1.41 in the near term.