The Canadian dollar CADUSD-FX is set to edge lower over the coming months as the threat of U.S. trade tariffs remains in place despite an early reprieve, but the currency is expected to recover and trade at a higher level in one year, a Reuters poll found.
U.S. President Donald Trump suspended his threat of 25% tariffs on Mexico and Canada on Monday, agreeing to a 30-day pause in return for concessions on border and crime enforcement with the two neighboring countries.
Since the beginning of October, the loonie has already weakened about 5%, hurt by trade uncertainty as well as a growing gap between U.S. and Canadian interest rates.
With the BoC cutting rates faster than the U.S. Federal Reserve, the Canadian 2-year note yield has fallen about 160 basis points below its U.S. counterpart, the largest gap since September 1997.
The median forecast of 35 foreign exchange analysts in the February 3-5 poll predicted the loonie would weaken 0.6% to 1.44 per U.S. dollar, or 69.44 U.S. cents, in three months, compared to the 1.43 level expected in a poll last month.
In a year, the currency was forecast to be up 1.0% at 1.4167, versus 1.3950 seen previously.
The currency’s outlook could hinge on whether the tariffs are implemented in March, said Derek Halpenny, head of research, global markets EMEA and international securities at MUFG Bank.
The Bank of Canada has estimated a 25% tariff on all imported goods to the United States, accompanied by the same-sized retaliation by trading partners, would lower Canadian economic growth by 2.5 percentage points in a year, likely triggering a recession.
Canada sends about 75% of its exports to the United States, including oil and cars.
“Our analysis indicates that the Canadian dollar would depreciate by 5% against the USD for every 10% permanent increase in the effective tariff rate,” said Mirza Shaheryar Baig, a foreign exchange strategist at Desjardins.
Even if tariffs are avoided or scaled back, trade negotiations could remain a headwind for the loonie. The United States-Mexico-Canada Agreement (USMCA) - a free trade pact between the three nations - is up for review in 2026.
“Trump is likely to continue threatening action and wanting to alter USMCA in favour of the U.S.,” MUFG Bank’s Halpenny said.
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