The political crisis in Canada has further compounded the visibly cooling labor market, weak economy, and concerns about 25% U.S. tariffs. Тhis onslaught of negative factors pushed the USDCAD quotes up. Let’s discuss it and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Canadian government loses unity, pushing USD/CAD higher.
- Ottawa ponders how to respond to Donald Trump’s threats.
- Rapid overnight rate cut puts pressure on the Canadian dollar.
- USD/CAD risks continuing the rally towards 1.455 and 1.488.
Monthly fundamental forecast for the Canadian dollar
Misfortune never comes alone. Canada became the third G7 country to face a political crisis before Donald Trump’s inauguration. Coupled with an aggressive cycle of monetary easing, economic weakness, and U.S. threats of a 25% tariff on all exports, this led to the collapse of the loonie. USD/CAD quotes soared to their highest in more than 4.5 years, achieving previously announced targets for long positions at 1.426 and 1.435.
Finance Minister Chrystia Freeland resigned over disagreements with Justin Trudeau’s government. His Liberal Party is losing popularity and will likely lose the parliamentary elections in October 2025. To appease voters, the Prime Minister has settled on tax cuts, which Freeland describes as an expensive political stunt. She believes Ottawa needs to “keep its fiscal powder dry” to respond to Donald Trump’s 25% tariffs.
According to Bennett Jones, U.S. tariffs on imports will reduce Canada’s real GDP growth by 0.6 percentage points in 2025 and by 0.5 percentage points in 2026. The Bank of Canada views the tariffs as highly disruptive to the economy, a source of uncertainty, and admits it is unclear which of Trump’s stated policies will be implemented.
Dynamics of Canadian economy
Source: Bloomberg.
At its latest meeting, the central bank cut the overnight rate by 50 basis points for the second consecutive time — a historic move outside of recessions, the COVID-19 pandemic, the 2008-2009 global financial crisis, and the September 11, 2001 terrorist attacks in New York. The Bank of Canada believes it has significantly supported the economy by lowering borrowing costs by 170 basis points to 3.25% over seven months, but it is now shifting to a more gradual approach.
National Bank Financial believes the BoC’s wording won’t prevent it from continuing its monetary easing cycle if the economy continues to weaken. Desjardins Group argues that November’s CPI slowdown to 1.9% allows for a 25-basis-point rate cut in January, followed by a pause in March. The company expects the overnight rate to end 2025 at 2.25%.
Monetary Expansion Scales
Source: Bloomberg.
Thus, USD/CAD‘s rapid rally is not surprising amid the political crisis in Canada, the risk of 25% U.S. tariffs, and the faster pace of monetary expansion by the BoC compared to the Fed. In 2024, the rate spread widened by 75 bps in favor of the U.S., which led to an almost 9% surge in the pair.
Monthly Trading Plan for USD/CAD
The Canadian economy was supported by exports to the U.S. If Ottawa and Washington start drifting apart, the BoC continues cutting rates, and the Fed pauses or even ends the process, the upward movement of USD/CAD toward 1.455 and 1.488 will continue. My advice is to buy.
Price chart of USDCAD in real time mode
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