TD Securities said softer April inflation in Canada and weak employment data are likely to keep USD/CAD supported near 1.37 in Q2 2026. It expects a more sustained decline in USD/CAD to emerge in H2 2026 if Canadian data improve and USMCA risks ease.
April CPI came in at 2.8% year on year, with prices up 0.4% month on month. This was below TD Securities and market expectations for 3.1% year on year.
Canada Inflation Signals Easing Pressures
The note referred to a broad easing across core inflation measures and further improvement in inflation breadth measures. It said this could allow the Bank of Canada to look past higher energy prices at its June meeting.
TD Securities said near-term downward drivers for USD/CAD remain limited and that pricing for a Bank of Canada rate hike in 2026 may still decline. The article was produced using an AI tool and reviewed by an editor.
The recent Canadian inflation data for April has shifted our near-term outlook. The consumer price index came in softer than expected at 2.8%, missing the 3.1% consensus and signaling that price pressures are easing. This gives the Bank of Canada room to remain patient before considering any further rate hikes.
To add to this, the latest jobs report from Statistics Canada showed a net loss of 12,000 jobs in April, pushing the unemployment rate up to 6.2%. This weakness in the labor market, combined with cooling inflation, reinforces the view that the Canadian economy is losing momentum. These factors suggest the Canadian dollar will struggle against the US dollar in the immediate future.
Options Positioning For USD CAD
For derivative traders, this points towards strategies that benefit from a stable or rising USD/CAD exchange rate in the coming weeks. We believe buying call options on USD/CAD with strike prices around 1.3750 and expirations in late June or July is a sound approach. This strategy offers upside potential if the pair continues to grind higher, while capping downside risk.
Looking back to the spring of 2025, we saw a similar situation where soft domestic data caused a divergence between Bank of Canada and Federal Reserve policy expectations, leading to a significant rally in USD/CAD. That period serves as a good reminder of how quickly the pair can move when economic fundamentals between the two countries diverge. Therefore, we expect the pair to remain well-supported near the 1.37 level for the remainder of this quarter.
While our short-term view is for USD/CAD to stay elevated, we also see the potential for a reversal in the second half of the year. Traders could consider selling out-of-the-money call spreads for September expiration to collect premium, betting that the pair will not break significantly higher. This must be watched carefully, as any resolution to the USMCA trade agreement review could quickly strengthen the Canadian dollar.
