The Canadian dollar ended 2025 on a steadier note. But Bank of America Securities says the recent surge may not last for now. The bank believes the currency has reached a balance point in the short term.
In a new report, Bank of America analyst Howard Du said the sharp moves in the Canadian dollar appear to be settling. He explained that after a year filled with trade worries and labor market shifts, the USD to CAD exchange rate looks fairly valued.
Canada has surprised markets with stronger than expected economic data. This has forced traders to unwind bets against the Canadian dollar. The change followed 3 straight months of solid job numbers. Those reports weakened the negative outlook that had pushed the currency to a low near 1.41 in November.
By December, USD to CAD dropped quickly to 1.36. According to Bank of America’s models, this level reflects fair value. The bank no longer sees the Canadian dollar as undervalued.
Even so, Bank of America is cautious about growing optimism in interest rate markets. Some investors are now betting on a Bank of Canada rate hike in 2026. Du believes those expectations are too early. He said inflation pressure in Canada remains weak and hard to find.
The bank does not see signs of the economy overheating. Instead, recent growth suggests Canada is simply recovering lost ground. Excess capacity is being absorbed without creating strong inflation. That makes further rate hikes less likely for now.
Looking ahead, Bank of America expects little movement in the near term. The bank forecasts USD to CAD to stay close to 1.38 through the first half of 2026.
Two forces are now shaping the outlook. A broad selloff in the US dollar could push the pair lower. At the same time, fading expectations for a Canadian rate hike could limit gains for the loonie.
Bank of America believes the next major move will come later. The bank expects another rise in the Canadian dollar only after trade uncertainty clears. That would likely happen once USMCA renegotiations are completed.
Until then, the currency pair is expected to stay stuck in a range. Despite Canada’s strong finish to 2025, further gains may remain on hold.