Canadian Dollar: Does the growth gap favour a range-bound outlook against the US Dollar? – Societe Generale

A widening growth gap with the US is weighing on the Canadian Dollar’s prospects, according to Societe Generale’s Kit Juckes, who examines USD/CAD following revisions to the IMF’s growth forecasts. With Canada’s outlook weaker than that of the US, he highlights two-year interest rate differentials as a guide to the currency. Historical trading ranges point to USD/CAD remaining broadly range-bound, while a substantial fall would require stronger Canadian fundamentals.

Can the Canadian Dollar Overcome the Growth Gap?

"With the IMF’s US growth forecast revised up to 2.5% this year (while remaining at 2.1% in 2027), the North American growth gap is widening. The chart on the right shows relative Bloomberg consensus growth forecasts for 2027, but the IMF’s assessment (1.2% growth in Canada next year versus 2.1% in the US) is even less favourable for Canada. The chart on the left shows the two-year rate differential plotted against USD/CAD."

"Over the last decade, USD/CAD has traded within a 1.20-1.45 range, averaging 1.33. If IMF (or Bloomberg) growth forecasts are largely assumed to be priced into the current exchange rate, then the upside from here appears limited. That is certainly the impression given by the series of recent spikes, each followed by a relatively swift retracement."

"A significant decline in USD/CAD, however, will likely require a meaningful narrowing of the growth gap and, by extension, a substantial reduction in the interest rate differential."

"It is therefore reasonable to expect USD/CAD to remain within the 1.20-1.45 range over the next decade and to average modestly above 1.30, unless another major shock occurs."

"In the near term, the most reasonable conclusion may be that a great deal of bad news is already priced in. However, pushing USD/CAD below 1.35, for example, will likely require a catalyst in the form of improved geopolitical conditions or stronger Canadian economic data."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)