Is the loonie headed for 60 cents? TD Economics says no

With oil prices volatile, U.S. tariffs looming and talk of Federal Reserve rate hikes, the idea of a "60-cent loonie" has become shorthand for the most pessimistic view of the Canadian dollar. In a question-and-answer report on the economic outlook published Wednesday, TD Economics took the question head on and concluded the currency is not headed there.

Where the loonie stands

TD estimates the Canadian dollar's fair value at about US$0.73, using a model that weighs interest-rate differentials, relative growth, economic data surprises, commodity prices and market volatility.

• The loonie averaged roughly US$0.71 in July and was trading near US$0.715 in mid-August, about 3 per cent below that fair value.
• Gaps of that size are common. The currency was much further below fair value in 2014 and 2015, and modestly overvalued through much of 2022 to 2024.
• Over the next 18 months, TD's model points to a range of roughly US$0.69 to US$0.74.
• Its baseline forecast is US$0.75 by the end of 2028, conditional on the Fed starting to cut rates next year.

What it would take to get to 60 cents

A drop to 60 cents would be a decline of nearly 20 per cent. TD says it would require several adverse shocks at the same time: a sharp and sustained fall in commodity prices, a historically large widening of the growth gap between Canada and the U.S., much higher bond-market volatility, and little offset from a broader decline in the U.S. dollar.

The pressures that are real

That does not mean the loonie is safe from weakness. TD's lower-end scenario assumes two more Fed rate hikes that widen the gap between U.S. and Canadian interest rates. Markets were pricing a 35 per cent chance of a Fed hike in September, while TD expects the Bank of Canada to hold at 2.25 per cent.

Trade is the other risk. TD estimates that the proposed 50 per cent U.S. tariff under Section 338, covering about 5 per cent of Canadian exports, could subtract roughly 0.3 percentage points from growth; the report noted the deadline had moved to Aug. 22. TD forecasts Canadian growth of 0.9 per cent in 2026 and 1.8 per cent in 2027. The Bank of Canada's July outlook projected 0.7 per cent growth this year and warned that its inflation forecast is "highly conditional on oil prices."

Oil: a support, for now

Energy remains a key prop for the currency. TD's base case has West Texas Intermediate crude averaging about US$84 a barrel in the third quarter and through year-end, easing to the low-to-mid US$70s next year as supply disruptions linked to the Strait of Hormuz ease. A faster fall in oil would remove some of that support.

What it means for Canadians

For travellers and cross-border shoppers, a loonie stuck in the low 70-cent range keeps U.S. trips and purchases expensive, but TD's analysis suggests a collapse is unlikely. For investors, currency moves affect returns on U.S. stocks and U.S.-dollar assets held in Canadian dollars. Rather than betting on the loonie's direction, many investors hold a mix of Canadian and foreign assets, and some use currency-hedged funds for part of their foreign exposure. This is general information, not personal advice.

Related

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