National Bank of Canada strategists explain why the loonie's strong third quarter stalled in late August ? and where they see USD/CAD heading next.
The Canadian dollar has taken a breather after one of its strongest quarters in more than a year, and strategists at National Bank of Canada say the pause is unlikely to be the end of the story. In a note published on 8 September 2026, the bank’s currency team described the loonie’s summer advance as interrupted rather than reversed ? stalled by the collapse of trade negotiations between Ottawa and Washington, but still leaving the currency roughly 2.5% higher against the US dollar quarter-to-date.
The assessment matters well beyond trading desks. The exchange rate feeds directly into import costs, cross-border travel budgets, corporate earnings translated back into Canadian dollars, and the inflation picture the Bank of Canada weighs at each decision.
From a 19-Month Low Near 1.42 to a 2.5% Quarterly Gain
The starting point for the rebound was a low one. At the end of June, USD/CAD sat near 1.42 ? a 19-month weak point for the loonie, meaning it took more Canadian dollars than at any time since late 2024 to buy a single greenback.
From there, the currency turned. National Bank attributes the recovery to a combination of better-than-expected Canadian economic data and firmer commodity prices, with both crude oil and gold contributing support. Canada remains a major exporter of both, and stronger prices typically improve the country’s terms of trade and draw capital toward Canadian assets.
The advance carried USD/CAD down to roughly 1.377 on 21 August, the strongest level for the loonie in the quarter. That move fits the pattern the Canadian dollar showed while holding near 1.3780 as oil prices stayed elevated, when energy strength repeatedly cushioned the currency against external shocks.
Why the August 21 Peak Was the High-Water Mark
The loonie’s run stopped almost immediately after that level was reached. According to the bank, the breakdown in trade talks between Ottawa and Washington removed the momentum behind the rally and put a floor under the US dollar.
Currency markets tend to price political risk quickly and then sit on it. Once negotiations stalled, traders had no fresh catalyst to push USD/CAD lower and a clear reason ? unresolved tariff exposure ? to stop adding to Canadian dollar positions. The result was a plateau rather than a rout: the quarter-to-date gain of about 2.5% survived, but the direction of travel changed.
The Tariff Overhang on Canadian Growth
National Bank’s core warning concerns what comes next for the real economy, not just the quote screen. New US tariffs and the broader uncertainty around the trading relationship represent downside risks to Canadian growth, the strategists said ? and weaker growth expectations typically translate into a softer currency.
The channel is straightforward. Tariffs raise the cost of selling Canadian goods into the country’s largest export market, discourage capital spending while the rules remain unsettled, and complicate the outlook for interest rates. Businesses facing an unclear border regime tend to delay hiring and investment decisions, which shows up in growth data months later.
The friction has already been visible in specific sectors, including the tit-for-tat measures behind the Canadian alcohol import ban and the US move to block motorcycles. Each individual dispute is small in dollar terms; collectively, they shape how currency markets price the risk premium attached to Canadian assets.
Canadian Dollar Forecast: A Rebound to 1.40 Before Easing to 1.33
National Bank’s published path has two distinct phases. In the near term, the bank expects USD/CAD to rebound toward 1.40 ? implying further modest weakness for the loonie from its late-August peak. Over a longer horizon, it sees the pair easing toward 1.33 by 2027, which would mark a meaningful recovery for the Canadian currency.
| Reference point | USD/CAD level | What it represents |
|---|---|---|
| End of June 2026 | Near 1.42 | 19-month low for the loonie |
| 21 August 2026 | About 1.377 | Quarter’s strongest loonie reading |
| Near term | Toward 1.40 | National Bank’s expected rebound in the US dollar |
| By 2027 | Toward 1.33 | National Bank’s longer-horizon projection |
Read together, the two figures describe a currency the bank believes is fundamentally undervalued but temporarily hostage to trade politics. The “fresh gains” in the bank’s framing are deferred, not cancelled.
Oil, Gold and Fading Confidence in a Strait of Hormuz Resolution
The commodity side of the argument carries its own caveat. National Bank flagged that markets have become less confident that tensions around the Strait of Hormuz will normalise by year-end ? a judgement it identifies as a key factor for oil prices.
The strait is the maritime chokepoint through which a substantial share of seaborne crude and liquefied natural gas moves. Sustained tension there keeps a geopolitical premium embedded in oil prices, which is not a neutral outcome for Canada:
- Supportive for the loonie: higher crude prices lift the value of Canadian energy exports and have historically correlated with a stronger Canadian dollar.
- Unhelpful for inflation: elevated global energy costs feed into fuel, freight and input prices at home, complicating the path for monetary policy.
- Unreliable as a floor: a sudden de-escalation would remove the risk premium quickly, and with it one of the supports under the currency.
Gold’s role is different. Bullion strength generally reflects defensive positioning rather than economic confidence, and Canada’s status as a significant producer means the loonie can pick up incidental support even when the underlying mood in markets is cautious.
What a 1.40 Loonie Would Mean on the Ground in Canada
A move from roughly 1.377 back toward 1.40 is not dramatic in percentage terms, but it is not invisible either. For households, a weaker Canadian dollar raises the landed cost of imported goods, US-dollar-priced online purchases and cross-border travel.
For business, the effect splits by exposure. Exporters selling into the United States gain a pricing advantage, while importers, firms servicing US-dollar debt and companies buying equipment abroad face higher costs. Investors holding US assets see those positions gain value when converted back into Canadian dollars ? one reason domestic equity performance and currency moves are often read together, as in the session when the TSX Composite fell 1.11% to a one-month low.
The Signals That Will Decide Whether the Rally Restarts
National Bank’s near-term call rests on assumptions that can shift quickly. Based on the factors the bank itself identifies, these are the variables worth watching:
- Ottawa-Washington negotiations: a resumption of talks, or their continued absence, is the clearest single driver of sentiment toward the Canadian dollar right now.
- The scope of new US tariffs: which sectors are covered, and for how long, determines how much of a drag the measures place on Canadian growth.
- Canadian data momentum: the strength that helped lift the loonie from its June low needs to persist to justify a return below 1.38.
- Crude and gold prices: both underpinned the third-quarter rally; a retreat in either weakens the case for renewed Canadian dollar strength.
- Strait of Hormuz developments: the bank explicitly names year-end normalisation expectations as a swing factor for oil.
Currency projections are forecasts, not guarantees. The levels cited here reflect one bank’s published view as of 8 September 2026 and can change with new data or policy developments; readers making financial decisions should verify current rates and consider professional advice.
Frequently Asked Questions
What does a USD/CAD move from 1.377 to 1.40 actually mean?
It means the US dollar is buying more Canadian dollars ? in other words, the loonie is weakening. At 1.40 it costs C$1.40 to buy one US dollar, versus about C$1.377 in late August.
Is the Canadian dollar still up for the quarter?
Yes. Despite the pause, National Bank notes the loonie retains a quarter-to-date gain of roughly 2.5% against the US dollar.
Why did the rally stop on 21 August specifically?
That was the day USD/CAD reached about 1.377, its low point for the quarter, immediately before trade discussions between Ottawa and Washington broke down and removed the momentum behind the move.
Why does the Strait of Hormuz matter to a Canadian currency forecast?
It is a critical global oil shipping route. Tension there keeps a risk premium in crude prices, and oil prices are one of the main influences on the Canadian dollar because energy is a leading Canadian export.
How far out does National Bank’s projection go?
The bank sees a near-term rebound in USD/CAD toward 1.40, followed by an easing toward 1.33 by 2027.
