Insights 
VT 
Bank of America has adjusted its forecast for the USD/CAD year-end rate, reducing it from 1.40 to 1.38. The bank predicts a medium-term decline to 1.35 and suggests a 1-year reverse knock-out put to capture this expectation.
Factors contributing to Canadian dollar strength in April included a Bank of Canada rate cut pause and expectations for fiscal expansion and investment inflows. However, the bank posits these influences led to a temporary overvaluation of the Canadian dollar.
Forecast and Strategy Overview
In the near term, the USD/CAD rate is expected to remain around 1.40 over the next two quarters before a gradual decline. A cost-effective strategy using a one-year options approach is recommended to benefit from an anticipated decrease in the USD.
A potential risk to this outlook is a recession in North America by 2025, which could strengthen the USD and negate the trade strategy. Overall, the bank projects a modest bearish trend for the USD/CAD exchange rate, with a focus on risk-managed options.
What the initial text lays out is a recalibration of foreign exchange expectations. Bank of America now sees the USD/CAD pair dipping slightly further than previously anticipated, trimming its year-end forecast from 1.40 to 1.38 and eyeing more downside towards 1.35 over the medium term. This comes with a specific recommendation: structuring exposure using a one-year reverse knock-out put option, aimed at capturing more favourable pricing, should the Canadian dollar indeed gain in the way the bank expects.
April presented a mix of support for the loonie — the Bank of Canada withheld further rate cuts at a time when other central banks leaned dovish, and fiscal policy chatter turned more expansionary. Investment flows followed, pushing demand for CAD. For a time, the CAD found buyers too enthusiastic; the bank now sees that moment as one of exaggeration, and not reflective of deeper fundamentals.
Risk Adjusted Strategy and Market Conditions
Despite that episode, price action hasn’t spiralled. The USD/CAD rate looks likely to hover at elevated levels (around 1.40) for at least two quarters. The descent towards 1.35, as they’ve outlined, is expected to unfold at a measured pace, well beyond the next few months. This helps explain why they’ve leaned on a longer-dated strategy with options—timing a directional view out to a full year while containing upfront costs.
We think it’s time to pay attention to risk-adjusted returns quite carefully. Volatility in options markets has pulled back enough to make alternative structures like knock-outs more attractive. But containment of delta risk matters as well—especially with global macro risks hovering. Hartnett, who has often pointed to the influence of cyclical downturns, raises the spectre of a North American recession pushing USD higher again if fear takes over. That could invalidate short-dollar views, at least temporarily. Position sizing, and potential rollovers, then become not just technical details but key execution steps.
A few things must be observed in the weeks ahead. First, rate differentials: Macklem and his team at the BoC could raise expectations for further easing, even if reluctant to pull the trigger just yet. That would weigh on CAD somewhat. Second, U.S. economic releases—especially job data—must not breach to the upside too severely, or else Powell could regain the aggressive narrative that supports USD near-term.
As for how we frame it, the one-year hedge retains value if spot softens over time, but even more if the initial stagnation higher allows for better pricing in rolling the structure. Timing trades ahead of this trajectory will mean watching legs such as lower volatilities on shorter tenors and movements in skew.
It’s not about bold directional views just now. We need to proceed with strategies where low carry and time decay work in favour, rather than becoming costs. If growth surprises lean worse into Q3 and Q4, that may accelerate the expected decline, opening exits before maturity.
So, while central banks hold the reins more lightly these months, positioning should be more cautious but not defensive. The target is clear. The path, slightly foggy. But with defined premiums and optionality in hand, we can take that walk.
