By Fergal Smith
TORONTO (Reuters) -The Canadian dollar is set to strengthen over the coming year against its U.S. counterpart as expected Federal Reserve interest rate cuts weigh on the greenback, but uncertain prospects for the United States-Mexico-Canada trade agreement could put that forecast at risk, a Reuters poll found.
The median forecast of 38 foreign exchange analysts in the September 26-October 1 poll predicted the loonie would strengthen 2.8% to 1.36 per U.S. dollar, or 73.53 U.S. cents,
in three months, matching the level expected in a survey last month.
In 12 months, the currency was forecast to gain 3.5% to 1.35, versus 1.3415 seen previously. The currency was trading on Thursday at a four-month low.
"Weakness on the USD leg should spill over onto the CAD leg and cause USD-CAD to move lower," said Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets, who expects continued deterioration of the U.S. labor market to drive further interest rate cuts from the Fed in 2026 and the Bank of Canada to soon end its more advanced easing campaign.
Investors are fully discounting just one more rate cut from the Canadian central bank, which last month lowered its benchmark rate to 2.50%..
Canadian gross domestic product declined at an annualized rate of 1.6% in the second quarter but recent data has suggested the economy avoided a second straight quarterly contraction.
"The output gap in Canada is expected to get less negative as peak tariff uncertainty is behind us," Ying said. "We are wrong if (U.S. President Donald) Trump starts to challenge USMCA, as trade negotiations remain ongoing."
The USMCA, which has shielded much of Canada's exports from U.S. tariffs, is up for joint review in 2026. Separate public consultations by the U.S., Canada and Mexico on the trade pact kicked off in recent weeks.
(Other stories from the October foreign exchange poll)
(Reporting by Fergal Smith; Editing by Chris Reese)
