Geopolitical Risks Anchor USD/CAD in Sideways Range

Key Moments

Safe-Haven Flows Support USD/CAD

Rabobank analysts Molly Schwartz and Christian Lawrence note that rising geopolitical uncertainty from the war in Iran has boosted safe-haven demand for the US Dollar. This demand keeps USD/CAD supported, even as interest-rate differences are expected to narrow.

Investors have reacted to financial risks by shifting to a “risk-off” stance. Consequently, safe-haven dynamics have returned, favoring the USD.

“In light of financial risks from the Iran conflict, investors have sharply moved to risk-off mode, reviving safe-haven fundamentals for the USD,” the analysts said.

They add, “USD remains king during uncertain times.”

Rate Differential Outlook and FX Projections

Rabobank projects the US-Canada interest-rate gap will narrow to 75bp by the end of 2026. Even with this, they expect only modest US Dollar weakness versus the Canadian Dollar.

“Therefore, our forecast for the US-CA rate differential through year-end 2026 remains unchanged, narrowing to 75bp. This may cause slight USD weakness versus CAD,” the analysts said.

Despite the narrowing, USD/CAD is likely to remain in a sideways range through 2026. However, risks favor a move toward the upper end of the recent trading band.

“We still see USD/CAD trading mostly sideways, though the risk points to a rise toward 1.40 sooner than current projections indicate,” they added.

Relative Performance: USD Versus CAD and Other Currencies

Ongoing safe-haven demand should keep the USD stronger than the CAD. At the same time, the Canadian Dollar is expected to hold up well compared with most other currencies.

“USD will outperform CAD on safe-haven flows, but CAD should outperform nearly everything else,” Schwartz and Lawrence noted.

Summary of Rabobank’s USD/CAD Outlook