Canadian 5 Bank Forecast, March 2025

Trade uncertainty is weighing on the US dollar, which has declined by 4% against a basket of 24 currencies since January, driven by speculative flows, including a significant reduction in long-dollar positions. However, the recent sell-off may be overdone, and safe-haven demand could provide support for the USD until Washington clarifies its trade policy on April 1. Meanwhile, the Canadian dollar remains highly volatile amid the persistent threat of US tariffs but has recovered some ground against the USD since touching 1.48 in early February. The 25% tariffs on aluminum and steel, potential 250% tariffs on dairy products, and China’s newly announced high import levies on Canadian agricultural goods are expected to weigh on Canada’s trade balance and economy. These headwinds set the stage for further monetary easing by the Bank of Canada in the first half of 2025, likely leading to a weaker loonie.

The euro staged its most aggressive one-week rebound against the Canadian dollar in 16 years at the start of March, surging 4.7 cents to nearly 1.59. This sharp appreciation propelled the currency, reaching its highest level since November. The European currency found renewed strength on a German push for defence and infrastructure spending which could reach 1 trillion € in the coming years. Moreover, the USD dollar has been on a reversal as uncertainty surrounding trade policy has spooked investors. Despite a comparatively dovish European central bank and the lingering possibility of a US-EU trade dispute set to unfold in April, speculators have essentially returned their short positions to neutral on the currency. While some of the recent appreciation is likely overdone, considering a still ambiguous growth and geopolitical outlook, we expect the European currency to head toward a stronger footing in the second half of this year.

The British pound has maintained a steady uptrend against the Canadian dollar, recently trading near 1.88, supported by diverging monetary policy expectations between the Bank of England (BoE) and the Bank of Canada (BoC). While the BoE has signalled a cautious approach to rate cuts due to persistent inflation, the BoC faces growing pressure to ease policy amid economic headwinds, including trade tensions and declining commodity prices. The loonie remains vulnerable to external risks, particularly US tariff threats and China’s import levies on Canadian goods, which could weigh on investor sentiment. Although short-term volatility is expected, the GBP/CAD pair may see further upside if the BoC moves towards monetary easing in the first half of 2025