The US greenback is down on most fronts this yr however it got here after years of good points. The staff at Scotiabank says do not get too comfy with USD longs because the worst is but to come back.
Of their Focus On 2026 outlook, Scotia’s Shaun Osborne and Eric Theoret are sticking to their weapons: they see broad USD weak point taking part in out via 2026 and into 2027.
The core thesis right here is easy: Divergence.
Scotia expects the Fed to chop charges considerably—taking the goal charge down to three% by the primary half of 2026. In the meantime, different main central banks are anticipated to make few coverage modifications and even tighten.
It is the traditional charge differential commerce and erodes the 2 pillars which have held the greenback up for therefore lengthy: increased relative development and people juicy yield differentials. We’ve been listening to concerning the “finish of US exceptionalism” for some time, however Scotia thinks the true ache level for the USD hits in Q2/Q3 of 2026 because the US labour market slows down and the Fed stays dovish.
The Euro and Yen: The quiet climbers
For the euro, the ECB is predicted to go away charges unchanged, which ought to increase EUR/USD increased. Scotia is focusing on a medium-term transfer into the 1.22-1.24 vary (spot at 1.17).
For the yen, with the BoJ anticipated to tighten modestly in 2026, the forex lastly will get some love. The forecast sends USDJPY all the way down to 140 by late 2026 and 130 by the top of 2027. (spot at 155.68)
The Contrarian Commerce: Purchase the Loonie
Should you’re searching for a non-consensus commerce, that is it. The market is overwhelmingly quick CAD proper now, however Scotia sees an enormous reversal incoming.
Whereas the Fed is chopping to three%, Scotia expects the Financial institution of Canada to truly begin climbing charges within the second half of 2026.
They see the unfold between the Fed and the BoC—which is at the moment an enormous 175 bps—collapsing to simply 25 bps by the top of subsequent yr. As that compression occurs, their forecast places USDCAD to 1.35 by year-end 2026, dropping to 1.30 by 2027. (spot at 1.3775)
Rising Markets: Warning on the Peso
For the carry merchants, the outlook on the Mexican Peso (MXN) is so much much less rosy. Scotiabank is bearish right here regardless of the yield.
Why? Banxico is chopping charges simply as volatility is selecting up. The narrowing unfold with the US, mixed with commerce uncertainty across the CUSMA evaluate, makes the risk-reward look poor. They see USDMXN grinding increased to 19.00 subsequent yr and 20.40 by 2027.
Scotiabank FX Forecasts at a Look
Listed below are the important thing ranges they’re awaiting the majors by December 2026:
- EURUSD: 1.21
- USDCAD: 1.35
- USDJPY: 140
- GBPUSD: 1.38
- USDMXN: 19.00
If Scotia is correct, the “increased for longer” US yields commerce is lifeless, and the rotation out of the greenback is the large macro play for 2026.
