Canada Dollar Sees Near-Term Constraint but 2027 May Bring Support, National Bank Says

The Canadian dollar is caught between improving domestic data and limited external support, but conditions might be in place late this year to provide support to the loonie in 2027, National Bank of Canada said in a note. Recent gross domestic product gains and stronger full-time employment have eased recession concerns, with Q2 growth tracking around 2.3% annualized, the bank said in a note Monday. However, weaker medium-term growth prospects, softer commodity prices, and the uncertainty on the ongoing United States-Mexico-Canada Agreement, or USMCA, trade discussions continue to limit the Canadian dollar's upside, Stefane Marion and Kyle Dahms said in the bank's note. A USMCA trade resolution would reduce uncertainty and help revive business investment, while Canada's more pro-growth policy agenda, which is focused on energy infrastructure, defense and industrial capacity, could improve Canada's investment outlook and support the loonie over time, added National Bank. Near term, lower Canadian inflation, limited scope for further Bank of Canada tightening and weaker oil and gold prices remain headwinds, according to the bank. A more sustained Canadian dollar recovery will.