On November 2, USD/CAD traded at 1.3955, down 0.12% on the day as the Canadian dollar edged higher. That strength contrasted with JPMorgan’s concerns about slowing economic activity and the amount of monetary tightening investors had priced in.
The bank’s research forecasts, reported on November 3, put USD/CAD at 1.41 in December 2026, followed by a decline to 1.39 by September 2027. This projected path implied some near-term Canadian dollar weakness before a modest recovery. The FX desk’s commentary was less confident about the immediate direction, acknowledging the currency’s ability to withstand disappointing data.
Stalled output complicates the case for further tightening
Following the October 30 GDP release, JPMorgan estimated that Canadian third-quarter growth was tracking near 1.5% at a seasonally adjusted annualised quarterly rate, below the Bank of Canada’s 2.0% forecast. Both figures describe quarter-on-quarter growth expressed at an annual rate. JPMorgan’s estimate was a nowcast, rather than an official quarterly GDP result.
Statistics Canada reported that real GDP was essentially unchanged in August for a second consecutive month. Its advance estimate pointed to a 0.1% decline in September. Official third-quarter GDP figures are scheduled for release on November 30.
The report was published two days after the Bank of Canada raised its policy rate by 25 basis points to 2.50% on October 28. The increase was intended to reduce the risk that persistently high energy costs would spread into broader inflation. Policymakers nevertheless acknowledged remaining spare capacity and signalled caution about further increases.
Spare capacity means parts of the economy can produce more without creating additional demand pressure. It can also make businesses less able to pass higher costs on to customers without losing sales.
For JPMorgan’s currency desk, the weaker GDP figures reinforced the argument for proceeding cautiously and made the amount of tightening embedded in market pricing harder to justify.
Markets expected more hikes than JPMorgan
A currency can lose support even when its central bank raises interest rates if investors had anticipated a substantially larger increase in borrowing costs.
In research published around October 30, JPMorgan noted that overnight-index swaps implied roughly three additional Canadian rate increases over the following year. Its economists expected only one more increase, in January 2027. Those swap prices reflect expectations at that time and should not be read as current market pricing.
The difference mattered for carry, the interest return associated with holding a currency. With Canada’s policy rate at 2.50%, JPMorgan considered other cyclical G10 currencies more attractive on this measure. If markets reduced their expectations for Canadian tightening, the loonie could lose some rate support.
The October increase therefore did not overturn the bank’s cautious Canadian dollar view. Its concern was potential currency weakness arising from the expected rate path, rather than a forecast that the Bank of Canada would immediately begin cutting rates.
Nevertheless, the desk acknowledged that the currency’s performance had reduced its conviction. Its account of October 30 trading showed mixed flows: corporate clients sold Canadian dollars, while systematic investors continued buying.
Ahead of the November 6 employment release, JPMorgan described the risks as two-sided and noted that the next Bank of Canada decision was priced close to an even chance of a hike. It expected employment data to have a limited impact unless they materially changed the inflation outlook.
What this means for USD/CAD
Relative to the November 2 exchange rate, JPMorgan’s 1.41 year-end projection implied a modest reversal of Canadian dollar strength. Reduced expectations for further tightening could support that scenario, particularly if weak activity persisted and inflation pressures eased.
The employment report published on November 6 added evidence of limited momentum. Employment was little changed in October, declining by 4,700, while the unemployment rate rose from 6.5% to 6.7%. Annual wage growth eased from 2.3% to 2.2%. These figures strengthen the case for caution, although they do not settle the next rate decision.
The Bank of Canada’s next scheduled announcement is December 9. Policymakers will continue weighing subdued activity against the risk of energy costs spreading into broader prices. The Canadian dollar’s earlier resilience, also reflected in our previous USD/CAD analysis, shows why disappointing growth alone does not guarantee a sustained rise in the pair.
