Canadian Dollar Forecasts Cut as CUSMA Talks Drag
Currency analysts have downgraded their forecasts for the Canadian dollar after the Trump administration declined on Wednesday, July 2, to extend the Canada-United States-Mexico Agreement, formally launching a decade-long wind-down clock on the trade pact while it seeks to rewrite terms. A Reuters poll of 39 foreign exchange analysts, conducted between June 26 and July 1, now places the loonie at 1.40 per U.S. dollar in three months — weaker than the 1.37 forecast in the previous monthly survey. The revision reflects growing concern that prolonged CUSMA uncertainty will suppress Canadian economic growth and eliminate the conditions needed for the Bank of Canada to raise interest rates.
The loonie touched a 14-month low of 1.4248 per U.S. dollar last week, according to Reuters. Speculators have raised their bearish bets on the Canadian dollar to the highest level since December.
The Reuters poll’s 12-month median forecast still projects the loonie recovering to 1.36 — a gain of 4.3 per cent from current levels — but that too is weaker than the 1.34 forecast set just one month ago. Both near-term and longer-term projections moved in the same direction, reflecting a broad-based reassessment rather than a short-term adjustment.
“The loonie has weakened considerably against the greenback over the past few weeks given shifting rate expectations vis-à -vis the U.S.,” Bradley Saunders, North America economist at Capital Economics, said. “We expect that trend to continue, as CUSMA-related uncertainty holds back growth — and therefore rate hikes — in Canada this year, while sticky core inflation and solid GDP growth push the Fed to reverse some of their earlier rate cuts.”
The monetary policy gap between the two countries lies at the heart of the currency’s weakness. Canada’s 2-year government bond yield now sits more than 140 basis points below its U.S. equivalent, the widest gap since May last year, Reuters reported. That spread signals that markets expect the Bank of Canada to remain on hold or tighten only marginally while the U.S. Federal Reserve holds rates at elevated levels.
Swap markets have priced in roughly 10 basis points of tightening from the Bank of Canada for the remainder of the year — down sharply from approximately 60 basis points in May. The Bank of Canada itself has said it sees limited evidence that higher energy prices are generating broad-based inflation, a signal that urgency around rate increases is low.
U.S. Federal Reserve Chairman Kevin Warsh reinforced that divergence on Wednesday when he said he will hold firmly to the Fed’s 2 per cent inflation target and “disappoint” anyone expecting a return to loose monetary policy, according to Reuters.
The immediate trigger for the loonie’s latest leg lower was the Trump administration’s decision not to extend CUSMA. Under the agreement’s terms, that refusal to extend starts a ten-year clock to terminate the deal entirely, leaving Canada and Mexico to negotiate revised terms under U.S. pressure. Canada sends approximately 70 per cent of its exports to the United States, including steel, aluminum, automobiles, and lumber — all sectors already subject to U.S. tariffs, Reuters reported.
The latest quarterly GDP data showed the Canadian economy slipping into a technical recession, according to Reuters. That context strips the Bank of Canada of the growth conditions that would normally support a rate-hiking cycle, reinforcing the asymmetry between Canadian and U.S. monetary policy that currency markets are pricing.
Chris Turner, head of foreign exchange strategy at ING, said before the CUSMA decision that he expected USD/CAD to hold above 1.42, with risks toward 1.45 if trade discussions deteriorated or the U.S. dollar overshot, FXStreet reported. The Trump administration’s formal refusal to extend the agreement on July 2 moved the situation from uncertainty to active negotiation pressure, bringing Turner’s downside scenario closer to the base case.
A separate Reuters poll on the U.S. dollar, published on the same day, found growing resistance to the prevailing weaker-dollar view, with a rising number of analysts forecasting smaller declines or near-term gains in the greenback. That dynamic compounds the pressure on the Canadian dollar by removing the tailwind of broad U.S. dollar weakness that supported the loonie through much of 2025.
Regional and Global Impact
Canada’s exposure to a prolonged CUSMA renegotiation is disproportionate relative to its North American partners. The country’s dependence on U.S. market access — at 70 per cent of total exports — means that uncertainty about the terms of that access translates directly into suppressed business investment, deferred hiring, and slower growth. Approximately 40 per cent of Canadian businesses expect to pass tariff-related cost increases on to customers over the next year, rising to 65 per cent among exporters, WealthNorth reported citing survey data.
For Mexico, a similar dynamic applies, though the peso enters the renegotiation from a different monetary policy position. For the United States, the decision to let the extension lapse reflects the Trump administration’s stated objective of reshoring manufacturing jobs and reducing bilateral trade deficits — the same logic that drove tariff actions in 2025 on Canadian steel, aluminum, and autos.
The Canadian dollar’s weakness feeds through to import costs for Canadian businesses and households, adding inflationary pressure through a different channel than domestic demand. The Bank of Canada has acknowledged that channel but noted it does not yet see it generating broad-based price rises — a judgment that the ongoing CUSMA uncertainty will test as negotiations develop through the second half of 2026.
Background
CUSMA — known in the United States as USMCA and in Mexico as T-MEC — replaced NAFTA in July 2020 and included a built-in mandatory six-year joint review, which formally began in July 2026. The review covers auto rules of origin, EV supply chain requirements, and other provisions the U.S. administration has said it wants to tighten. Canada’s overnight lending rate currently stands at 2.25 per cent, at the lower bound of the Bank of Canada’s own estimated neutral range of 2.25 to 3.25 per cent. The U.S. imposed 25 per cent tariffs on Canadian steel and aluminum in March 2025, followed by tariffs on automobiles in April 2025. The Canadian dollar rose 5 per cent against the U.S. dollar across 2025 as a whole, recovering from a multi-decade low of 1.4793 hit in February 2025, before the latest deterioration in CUSMA prospects reversed some of those gains.
What Happens Next
The CUSMA review has no fixed deadline for resolution — the Trump administration’s refusal to extend the agreement triggers a ten-year wind-down period during which all three parties must renegotiate or allow the deal to lapse. The Bank of Canada’s next rate decision has not been scheduled in the source material available, but swap markets are currently pricing in only 10 basis points of tightening for the full year. Reuters will publish the next instalment of its monthly foreign exchange analyst poll in approximately four weeks. Canada’s quarterly GDP figures, which confirmed the technical recession cited in the current data, will be followed by updated readings as the year progresses. The Bank of Canada will issue updated inflation and growth projections in its next Monetary Policy Report.
