Canada’s battered currency is due for a modest rebound against the U.S. dollar in the back half of 2025, say foreign exchange analysts bracing for a storm of political and economic risks in the months ahead.
The loonie (CADUSD=X) is trading at its weakest level versus the U.S. dollar since March 2020. The sudden resignation of Finance Minister Chrystia Freeland on Monday intensified downward pressure on the currency that has persisted since U.S. President-elect Donald Trump’s electoral win in November.
Trump, who’s due to be inaugurated for his second presidential term next month, has threatened to impose a 25 per cent tariff on imported goods from Canada. How this plan would materialize is unclear. Experts say Trump could hesitate if U.S. consumers face higher prices due to a trade war.
Karl Schamotta, chief market strategist at Corpay, says the loonie was already facing strong headwinds prior to recent political drama.
“The Canadian dollar’s underperformance has deepened over the last two years,” he wrote in his firm’s 2025 outlook. “Soft commodity prices, subdued investment, and rising household borrowing costs—the heaviest in the G7—are weighing on economic growth, forcing the central bank to ease policy more aggressively than the Federal Reserve.”
Corpay forecasts the USD/CAD (CAD=X) will fall from current levels to $1.42 in the first quarter of 2025, then to $1.40 in Q2, $1.38 in Q3, and $1.36 in Q4.
“Prospects could brighten as the year progresses,” Schamotta wrote. “The Bank of Canada’s easing efforts might translate into a sustained rebound in consumer spending and housing activity, while spillovers from robust U.S. growth bolster other areas of the economy.”
He adds that a Conservative government replacing Prime Minister Justin Trudeau’s Liberals in the next federal election could improve Canada’s trade relations with the U.S., aiding a potential recovery for the loonie.
“By year-end, the exchange rate could regain some lost ground as domestic and international conditions stabilize,” Schamotta wrote.
RBC Capital Markets analyst Daria Parkhomenko says Canada has a lot to lose if Trump were to implement the 25 per cent tariff, with 80 per cent of the nation’s goods exports bound for the U.S. RBC also estimates 12 per cent of Canada’s workforce is in industries that export to America.
“The negative implications for the U.S. leave Canada less likely to be hit with extreme and protracted tariff measures (targeted measures possible),” Parkhomenko wrote in the bank’s 2025 FX outlook report. “That said, we cannot rule out the risk of further tariff headlines affecting CAD negatively.”