USD/CAD Price Outlook for the Year: Struggling Loonie Unlikely to Benefit from Fed Rate Cuts in 2025
- The Canadian Dollar faced significant challenges in 2024, dropping to its lowest levels in nearly five years.
- The Bank of Canada’s aggressive rate-cutting strategy has amplified the interest rate disparity between the CAD and the USD.
- With the Federal Reserve considering a more cautious approach to rate adjustments, this divergence could expand further in 2025.
The Canadian Dollar (CAD) struggled through much of 2024, fluctuating within a familiar midrange before succumbing in the final quarter, sliding to multi-year lows against the US Dollar (USD). Speculation about a widespread USD downturn proved highly exaggerated, as the Greenback’s impressive Q4 performance dealt another blow to the Loonie.
Canadian Dollar in 2024: Aggressive Bank of Canada Easing Takes a Toll
USD/CAD climbed to the 1.4400 level by the close of the year, ending 2024 approximately 9% higher than its starting point near 1.3230. While both the Bank of Canada (BoC) and the Federal Reserve (Fed) initiated rate-cutting cycles in 2024, the BoC’s more aggressive pace of reductions significantly weakened the Loonie, driving USD/CAD higher as the rate differential widened throughout the latter half of the year.
The Bank of Canada’s (BoC) key policy rate reached a peak of 5.0% in July 2023. However, it took nearly a year for the BoC to pivot toward easing monetary policy, beginning with a modest 25 basis point (bps) rate cut in June 2024. This was followed by four additional cuts in the latter half of the year, with the final two cuts increasing to 50 bps each.
As a result, Canada’s interest rate now stands at 3.25%. While this is significantly higher than the 0.25% record low of 2022, it remains considerably below the U.S. Federal Reserve’s federal funds rate, which only dropped from 5.5% to 4.5% during the same period. The Federal Reserve was notably slower in initiating rate reductions, delaying its first cut of 2024 until September.
Meanwhile, global crude oil markets offered little support for the Canadian Dollar throughout 2024. Although crude oil prices displayed strong bullish momentum in the first quarter, they stabilized thereafter due to subdued global demand forecasts for fossil fuels. Additionally, geopolitical tensions in the Middle East, while initially concerning, did not result in significant supply disruptions. Historically, the Canadian Dollar’s correlation with crude oil prices has been inconsistent, and the steady decline in oil prices by mid-2024 further dampened the Loonie’s bullish potential.
**READ MORE – Gold and Silver Market Report 2025: Key Insights
Canadian Dollar in 2025: What Lies Ahead?
The USD/CAD price chart reflects a scenario where technical factors have taken precedence over fundamentals. While the chart indicates potential for a technical reversal, making it an attractive opportunity for momentum traders, substantial challenges lie ahead for the Canadian Dollar.
Canadian Prime Minister Justin Trudeau faces mounting difficulties in maintaining government stability, highlighted by the unexpected resignation of Finance Minister and Deputy Prime Minister Chrystia Freeland on the same day she was scheduled to present the government’s latest economic forecast.
Political uncertainty, both domestically and internationally, poses significant risks to the Loonie as 2025 approaches. In the U.S., President-elect Donald Trump has actively used social media to advocate for sweeping tariffs on the nation’s key trading partners, including Canada. Meanwhile, Canada is likely heading toward a federal election in 2025. Although Conservative Party leader Pierre Poilievre, the leading opposition candidate, is unlikely to implement policies favorable to the Loonie, heightened risk-off sentiment may weigh on CAD leading up to the election.
The Bank of Canada (BoC) is also expected to continue its monetary easing through 2025, likely at a faster pace than the U.S. Federal Reserve, further pressuring CAD’s rate differential. The BoC faces considerable pressure to lower rates to support Canada’s economy, which is heavily reliant on its real estate sector, as housing investors push for financial relief.
In contrast, the Federal Reserve projects a more measured approach, with its December 2024 Summary of Economic Projections (SEP) signaling only two additional quarter-point rate cuts in 2025—well below the four or more cuts anticipated by markets earlier in December.
If the BoC maintains its aggressive rate-cutting stance while the Fed slows its pace of monetary easing, the widening rate differential could place additional downward pressure on the Canadian Dollar, potentially driving it further lower against the U.S. Dollar.
As 2025 begins, uncertainty takes center stage, with subdued risk sentiment likely bolstering the Greenback’s strength as investors adapt to a shifting geopolitical landscape characterized by frequent risk-off market conditions. The Canadian Dollar appears set to weaken further in the first quarter, but CAD investors will closely monitor the evolving dynamics between the Federal Reserve and the Bank of Canada as the year progresses, particularly heading into the mid-year quarters.
READ THE FULL REPORT AT CAPITAL STREET FX
1 post - 1 participant
Read full topic
