The Canadian dollar has clawed back some ground as the spread between U.S. and Canadian policy expectations narrows, giving the loonie a firmer footing after months of pressure from a stronger greenback and uneven global risk appetite.
Canadian dollar firms as rate gap narrows
The move matters because exchange rates are being driven less by commodity headlines and more by relative rates. U.S. policy is still restrictive, but the market no longer sees the Federal Reserve and Bank of Canada diverging as sharply as it did earlier in the year. The U.S. 10-year Treasury yield has eased to 4.95%, while the 2-year spread over Canada’s equivalent has compressed to 33 basis points, a level that points to less support for the dollar than when U.S. yields were much more dominant. That narrowing rate differential is helping the loonie stabilize even as broader demand for the greenback remains firm.
Sentiment IndicatorsⓘProprietary · adalytica.com · September 13, 2026
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For investors, the implications run beyond FX screens. A firmer Canadian dollar can ease imported inflation for households and businesses, but it also pressures exporters and commodity producers that benefit from a weaker currency. It may also alter returns for U.S.-based investors in Canadian assets, particularly if the rebound proves durable rather than just a short-covering bounce. On the technical side, CAD/USD has been hovering near 1.38, with the pair close to its 200-day moving average and above the 50-day average, suggesting the currency has stopped weakening in a straight line even if the trend has not decisively turned.
Scotiabank’s view that the loonie can keep gaining reflects a simple macro argument: when rate expectations stop widening against Canada, the currency no longer has to absorb the full weight of U.S. yield advantage. That does not make the outlook uniformly constructive. A sustained U.S. growth surprise or another leg higher in Treasury yields would quickly restore the dollar’s edge. But for now, the market is treating narrower policy gaps as enough to support a modest Canadian dollar recovery, especially after the recent run-up in the U.S. dollar began to look overextended.
The next test is whether the Bank of Canada can preserve the relative-rate cushion without triggering renewed pressure on domestic growth. If U.S. yields stay near current levels and Canadian policy remains steady, the loonie has room to extend its rebound. If not, the currency is likely to revert to trading as a funding-sensitive, risk-sensitive proxy rather than a clean beneficiary of rates.
| Entity | Gains | Losses |
|---|---|---|
| Canadian dollar | ▲Firmer valuation | ▼Exporters |
| Bank of Canada | ▲Less currency pressure | ▼Import-sensitive firms if rebound fades |
| U.S. dollar | ▲Yields remain supportive | ▼Rate premium narrows |
| Canadian importers | ▲Lower input costs | ▼U.S.-based CAD bulls if rally stalls |
