Canadian 5 Bank Forecast, February 2025

President Donald Trump’s threat to impose tariffs on Canadian goods, followed by a 30-day postponement, raises questions about his ultimate objective. While trade deficits remain a key justification, his rhetoric suggests a push for deeper US control over Canada, hinting at a shift from economic pressure to a broader assimilation strategy. In addition to tariffs, his administration has linked trade policies to stem the flow of drugs and illegal migrants across the northern border, framing Canada as both an economic and security concern. The unpredictability of his demands leaves Canada vulnerable to shifting trade policies with significant economic and political ramifications. The Canadian dollar could face mounting pressure if uncertainty persists, amplifying volatility in financial markets. With tariffs still on the table and Trump's stance everchanging, prolonged instability could weaken investor confidence and lead to further depreciation of CAD.

EUR/CAD faces downside risks as US tariff threats on European exports and Canada’s exposure to shifting US trade policies weigh on both currencies. While the eurozone struggles with weak economic growth and potential ECB rate cuts, the Canadian dollar remains vulnerable to trade uncertainty. The Trump administration’s aggressive trade stance increases the likelihood of tariffs on European goods, particularly autos and industrial products, which could further weaken the euro. At the same time, Canada’s exposure to US trade policy remains a key risk, especially if Trump follows through on tariff threats. With the ECB leaning toward a more accommodative stance, EUR/CAD could remain under pressure, with volatility driven by trade policy developments and central bank actions.

GBP/CAD faces mixed drivers as trade uncertainty, monetary policy divergence, and global risk sentiment influence both currencies. The British pound remains under pressure following weak growth data, a widening budget deficit, and the Bank of England’s recent rate cut, which signals a more dovish stance ahead. Meanwhile, the Canadian dollar is weighed down by ongoing US trade threats, particularly with Trump’s shifting tariff policies affecting Canada’s exports. While the UK is not a primary target for tariffs, Canada’s exposure to US trade policy remains a key risk. If trade tensions escalate further, CAD could weaken, offsetting some of the downside pressure on GBP. However, if risk sentiment improves and oil prices remain stable, CAD could outperform, keeping GBP/CAD rangebound in the near term.