Currency markets are often driven by interest-rate differences, and a Dutch bank thinks that dynamic could give the Canadian dollar a boost in the coming years. In a note released Wednesday, ABN AMRO said it expects the Bank of Canada to keep raising interest rates in 2027, even as the U.S. Federal Reserve and the European Central Bank begin cutting theirs. That divergence, the bank argues, could lift the loonie—the nickname for Canada's dollar—by 2028.
The logic is straightforward: when one country's central bank keeps rates higher than its peers, holding that currency can pay more in interest. Investors seeking yield may buy Canadian dollars, pushing up its value. ABN AMRO sees that scenario playing out, with the Bank of Canada potentially tightening in 2027 while the Fed and ECB ease late in the year.
Two factors that could cap the loonie's gains
But the bank also flagged two important offsets. First, Canada's economy is tightly linked to the U.S. through trade. Tariff headlines can sway the USD/CAD exchange rate even when interest-rate math points the other way. If the U.S. imposes new tariffs on Canadian goods, the loonie could weaken despite higher rates.
Second, Canada is a major energy exporter. A slide in oil and gas prices in late 2027 and 2028 could mean less export income flowing into the country, which can weaken demand for the loonie. Energy exports are a significant source of foreign currency for Canada, so lower prices tend to reduce the inflow of dollars and other currencies.
You can already see that push and pull in the market. The loonie is up 2% against the euro this year, but down 3% against the U.S. dollar. That divergence reflects the different forces at play: rate expectations and trade ties with the U.S. versus the eurozone, where the ECB's policy path is more straightforward.
Why the euro may be the cleaner test
ABN AMRO's 2027 rate-gap call makes EUR/CAD a cleaner test than USD/CAD. Against the euro, interest-rate differences tend to dominate, so if Canadian rates stay higher, the loonie could gain more clearly. Against the U.S. dollar, trade ties and tariff risk can add an extra layer that may overwhelm rate-driven support.
For global investors in Canadian bonds or other Canadian-dollar assets, the key variable may be less the spot loonie and more how expensive it becomes to hedge the currency exposure over time. A wider policy gap doesn't just move today's exchange rate; it also shifts forward exchange rates, which bake in interest-rate differences. If Canadian short-term rates stay higher, investors holding Canadian dollars tend to earn more interest, while those hedging Canadian-dollar assets back into euros or dollars may find hedging costs rise.
That's why the loonie often responds more clearly against lower-yielding currencies like the euro, where interest-rate differences dominate. Against the U.S. dollar, the relationship is muddier because of the deep economic integration between the two countries.
What it means for investors
For everyday investors, this is a reminder that currency movements are not just about headlines—they reflect a complex mix of central bank policy, trade flows, and commodity prices. If you hold Canadian assets or are considering them, it's worth watching the Bank of Canada's policy path and energy prices, as well as any tariff developments.
The broader backdrop is also relevant. Hot inflation has revived Fed hike bets, which could change the rate picture. If the Fed ends up hiking rather than cutting, the gap ABN AMRO expects might not materialize. Similarly, the dollar has been edging higher in recent sessions, partly on rate expectations.
For those with exposure to Canadian dollar assets, the key takeaway is to consider the hedging costs and the potential for currency swings. Emerging-market currencies have been diverging as the dollar firms, and the loonie is no exception. The pound slipped to $1.331 on hot U.S. inflation, showing how rate expectations move currencies.
ABN AMRO's forecast is just one view, and currency predictions are notoriously difficult. But the underlying logic—that rate gaps matter—is a useful framework for understanding why currencies move. Whether the loonie actually rises by 2028 will depend on how central banks navigate inflation, growth, and trade tensions.
For now, the loonie's mixed performance against the euro and the dollar illustrates the competing forces at play. Investors should keep an eye on the Bank of Canada's next moves, as well as oil prices and any tariff news, to gauge where the currency might head next.
