USD/CAD price forecast: Canadian dollar weakens as U.S. tariff threat looms
Canadian dollar weakens as tariff fears and rate cut bets drive USD/CAD higher
The Canadian dollar has weakened significantly, with USD/CAD surging to nearly 1.4350, nearing its 22-year low of 1.455 seen on January 31. The decline comes as renewed U.S. tariff threats dampen investor sentiment and raise speculation over potential Bank of Canada (BoC) rate cuts. President Donald Trump has confirmed 25% tariffs on Canadian goods and 10% tariffs on energy exports set to take effect in March. The uncertainty surrounding Canada’s trade relationship with the U.S., its top export destination, has significantly weighed on the loonie.
The market is increasingly pricing in over 50% odds of a 25 basis points rate cut by the BoC at its March 12 policy meeting. The probability of a total 60 basis points of easing over the next 12 months has also risen, compared to 40 basis points earlier this week. However, with core inflation tracking above the BoC’s Q1 projection of 2.5%, some analysts suggest the central bank may pause rate cuts to assess economic conditions.
USD/CAD price movement (Jan 2025 - Feb 2025) Source: TradingView.
Potential for USD/CAD to hit $1.48 if tariffs materialize
Market analysts at ING suggest that if tariffs on Canadian imports proceed as planned, USD/CAD could climb to 1.48, reflecting increased downside risks for the Canadian dollar. ING also highlights that the Mexican peso has remained relatively stable as Mexico is seen as more likely to negotiate a deal with the U.S., while Canada appears less inclined to compromise.
The short-term risk premium on USD/CAD has risen to 2%, still below the 4% peak seen on February 3, when markets fully priced in potential tariff risks. Analysts suggest that if tariffs are officially implemented on March 4, USD/CAD could move toward the 1.50 level, marking a significant shift in the currency pair’s trajectory.
Economic data and crude oil weakness add to pressure
Beyond trade tensions, Canada’s economic outlook remains fragile. Statistics Canada’s advance GDP data shows a modest 0.2% monthly increase in real GDP after a 0.2% contraction in November. However, business investment remains weak, and inventory destocking is expected to drag on Q4 growth, adding to concerns over sluggish domestic expansion.
Additionally, falling crude oil prices—currently hovering near a two-month low—have added another layer of weakness to the Canadian dollar. With Canada being a major oil exporter, lower crude prices typically exert downward pressure on the currency, reducing demand for the loonie.
Outlook: USD/CAD remains bullish as tariff fears escalate
Unless de-escalation signals emerge, USD/CAD is expected to stay on an upward trajectory, with 1.45 as the next key resistance level. Should tariffs be implemented on March 4, a test of 1.48 or higher is possible. On the downside, if markets perceive a potential resolution between the US and Canada, USD/CAD could retrace toward the 1.42 - 1.43 support zone.
For now, traders are closely monitoring BoC policy signals, US-Canada trade negotiations, and oil price movements to gauge the next move in USD/CAD.
As previously discussed USD/CAD surged amid rising tariff concerns, BoC rate cut expectations, and weak crude oil prices.
