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The Canadian Dollar will trend back to the levels seen at the height of U.S. tariff fears during early February.
This is according to a new assessment from Canadian lender Desjardins.
The bank looks for weakness in the coming months but also says the recent strengthening by CAD should not come as a surprise as short-term gains reflect the unwinding of long U.S. dollar positions by investors.
"Our factor model for USD/CAD estimates a short-term fair value of 1.42, unchanged from our last update," Desjardins economists Jimmy Jean and Mirza Shaheryar Baig wrote. "With long USD liquidation underway, we wouldn’t be surprised to see some overshoot to the downside in the coming weeks."
Despite this near-term strength, Desjardins expects the Canadian dollar to lose ground later in 2025, citing a weaker domestic economy, an aggressive Bank of Canada easing cycle, and rising U.S. tariffs on Canadian goods.
“We maintain our view that USD/CAD will rise to 1.48 by mid-year,” the analysts wrote, adding that the Bank of Canada (BoC) may deliver more rate cuts than markets expect, bringing the terminal rate below 2.5%.
While the immediate threat of 25% U.S. tariffs on Canadian imports has been postponed, Desjardins economists believe that tariffs will still be implemented as early as the second quarter, reinforcing CAD weakness.
U.S. President Donald Trump told the press on Monday that tariffs on Canada - set for March 03 - were still "on time" and "moving along very rapidly".
The comments will serve as a reminder of the risks facing the Canadian Dollar and limit the scope for further gains.
Possible Upside Risks for CAD
Desjardins outlined two key scenarios where CAD could outperform expectations.
Improved U.S.-Canada Trade Relations: "A new trade deal after Canada’s federal elections could ease investor concerns," Jean and Baig wrote, adding that Canada might offer defence purchases or other concessions to secure a better trade arrangement with Washington.
U.S. Economic Weakness: If U.S. business confidence deteriorates due to uncertainty over trade policy and tighter immigration enforcement, the resulting slowdown could weigh on the U.S. dollar, boosting CAD.
Despite these risks, Desjardins remains firm on its 1.48 forecast, citing the combination of monetary policy divergence and trade headwinds as limiting factors for any sustained CAD rally.