Image © Adobe Images
A year-ahead prediction from one of the world's biggest banks says the Canadian Dollar should recover lost value against the U.S. Dollar in 2025.
However, Bank of America warns that its recovery depends on Donald Trump sparing Canada from hefty import tariffs.
Assessing Canada's prospects in 2025, Bank of America says the country will experience improved growth rates and that it will avoid new tariffs under Trump.
Economists predict GDP growth will accelerate to 2.3% in 2025 from 1.2% in 2024 due to lower interest rates and resilient U.S. growth.
Uncertainty regarding US policies is also a downside risk, as tariffs would hurt Canadian activity. However, the bank says its "baseline is that the US will not impose tariffs on Canada."
For CAD, improving growth spells improved performance.
"We still expect weaker USD in 2025 but with a shallower USDCAD downtrend. The global macro backdrop for CAD has deteriorated after the U.S. election and inflation divergence now favors a stronger USD. However, domestic growth in Canada is set to expand and the Bank of Canada is close to the end of the cutting cycle," says Howard Du, an analyst at Bank of America.
Du says the Dollar-Canadian Dollar exchange rate (USD/CAD) is forecast to fall to 1.37 by year-end 2025 and to 1.35 by year-end 2026.
He concedes near-term bullish USD momentum and tariff headlines could keep USD/CAD elevated at 1.40 in the coming quarter.
"However, we would expect stronger domestic growth data to drive pair lower once tariff risk premium for the USD starts to fade," he explains.
Trump sent CAD lower last week when he said on social media he would impose a 25% import tariff on Canadian imports to the U.S. unless Canada dealt with the flow of illegal immigrants coming into the U.S.
The market was taken aback, thinking Canada was likely to be low on Trump's agenda.
These threats, and subsequent threats against other countries, show Trump will use tariffs as a key piece of leverage in his geopolitical agenda.
For CAD, fulfilling of such threats will have a notable impact.
"In the most extreme scenario that the US applies 25% tariff on Canada and the BoC also decides to lower policy rate further to support domestic growth, we could see USDCAD rallying to as high as 1.50-1.55," says Du.