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Risks skewed toward an outsized Canadian dollar rally if trade risks fail to materialise.
CIBC said the Canadian dollar is undervalued by most metrics and stands out as one of the cheapest currencies in the G10 despite relatively loose domestic financial conditions.
The Canadian lender and investment bank says interest rates in Canada sit at the lower end of the Bank of Canada’s neutral range and credit spreads are "at the tightest levels since 2007", even as the currency remains weak.
In a year-ahead outlook note to clients, CIBC notes that the trade-weighted Canadian dollar has fallen 3.3% from its June highs despite the S&P TSX outperforming the S&P 500 year to date.
Looking into 2026, CIBC says "the fundamental story in Canada is one of slow recovery as peak tariff uncertainty is behind us", with looser financial conditions and fiscal policy expected to support growth.
Despite those tailwinds, the bank said the Canadian dollar has failed to benefit from U.S. dollar weakness, noting that gains from dollar depreciation this year have been "extremely concentrated in the European currencies".
CAD is undervalued: "USD/CAD is trading abnormally high with DXY at 100" - CIBC.
CIBC says historical relationships suggest USD/CAD is misaligned, pointing out that when the dollar index trades near 100, USD/CAD has averaged around 1.3250, making levels above 1.40 "highly abnormal".
The bank says a key drag on the currency has been uncertainty surrounding the USMCA review scheduled for July 2026, which is significant given that around 90% of Canadian goods are USMCA-compliant.
"USD/CAD is pricing in an extremely pessimistic outcome for USMCA", says CIBC, adding that it would be "extremely difficult" for the U.S. administration to withdraw from the agreement without a viable alternative.
CIBC sees risks skewed toward an outsized Canadian dollar rally if trade risks fail to materialise and accumulated short positions are forced to unwind.
For that reason, the bank says it expects USD/CAD to fall gradually, forecasting the pair will decline to 1.35 by the end of next year.
GBP/CAD is forecast to trade to 1.86 by mid-year and then 1.81 by year-end.
For EUR/CAD, the profile is 1.66 ahead of a fall to 1.59.