Why Rabobank Sees Dual Risk Pushing USD/CAD Higher

Rabobank analysts have flagged a dual threat to the Canadian dollar: rising domestic recession risk and the unresolved USMCA trade review. The warning comes as [USD/CAD](/markets/dollar-holds-two-month-high-as-iran-israel-truce-falters) holds near multi-month highs, with the pair already pricing in a softer growth outlook for Canada relative to the United States.

USD/CAD: Recession Risk and Trade Overhang

The core of the Rabobank thesis is that Canada’s economy is vulnerable to a downturn even as the Bank of Canada begins to ease policy. Slower consumer spending and a cooling housing market have raised the probability of a technical recession – two consecutive quarters of negative GDP growth. At the same time, the upcoming USMCA review introduces tariff uncertainty that could further dampen business investment and export demand. For USD/CAD, this combination of weak domestic fundamentals and external trade risk typically pushes the pair higher, as capital flows favor the relative safety of the U.S. dollar.

The mechanism is straightforward: when Canada’s growth outlook deteriorates faster than that of the United States, the interest rate differential widens in favor of the dollar. The Bank of Canada has already cut rates twice in 2024, and markets are pricing additional cuts through year-end. Rabobank’s view implies that the pace of easing may accelerate if recession fears materialize, pressuring the loonie further.

Bank of Canada Rate Path Under Pressure

The Rabobank call aligns with the broader market repricing of BoC policy. The OIS curve now implies roughly 75 basis points of additional cuts over the next 12 months, compared with about 50 basis points of Federal Reserve easing. That differential is a direct headwind for CAD. If recession fears deepen, the gap could widen further, pushing USD/CAD toward the 1.38-1.40 zone last seen during the 2020 pandemic selloff.