Economic Outlook and Summary
The New Year started with high hopes for the Canadian political landscape. Prime Minister Justin Trudeau announced his resignation. However, the cheers soon turned to dismay as he prorogued Parliament and decided to stay on as Liberal leader until March 20, the day of the Liberal leadership vote. But that was just a domestic issue—the real show was taking place south of the border.
Donald Trump was still “President-elect” until January 20, but he incessantly lobbed grenades into financial markets with musings of repatriating the Panama Canal, annexing Greenland, and turning Canada into the 51st state.
As the month progressed, Trump’s tariff threat level ratcheted higher and then came to a head on January 20, just after he was sworn in as the 47th President. He mused that he was thinking of imposing 25% tariffs on Canada and Mexico and 10% tariffs on China.
Those musings became reality on February 1, when Trump signed an executive order justifying the decision under national security.
The USD and Federal Reserve
The Fed was essentially a spectator in January. The minutes from the January 8 FOMC meeting were released, but they did not offer any fresh insight. Policymakers were cautious, and although they didn’t say anything about tariffs outright, committee members mentioned upside risks to inflation and hinted that the current interest rate level was significantly closer to its neutral value than when they started easing last September. The US dollar index declined until Trump’s inauguration, then rallied steadily. It spiked to 109.80 from 107.75 on the heels of news that Canada, Mexico, and China tariffs would begin February 4.
The Canadian Dollar and Bank of Canada
It has not been a very good year for the Canadian dollar. Canadian political dysfunction and Trump’s tariff threats left the Loonie bouncing erratically in a USDCAD range of 1.4260-1.4510. The top was blown off at the start of February after Trump signed the executive order to impose tariffs on Canada. USDCAD exploded higher, reaching 1.4795, then dropped to 1.4550 on hopes (prayers) that the tariffs were just a negotiating ploy. Those hopes were stoked on February 3 after Trump announced a delay to the imposition of Mexican tariffs until March 1.
Trump spoke to Trudeau on February 3 and plans another chat in the afternoon after ignoring all of Trudeau’s calls since January 20.
If Canada gets a reprieve until March, USDCAD will likely trade in a 1.4350-1.4700 range. If not, 1.5000 may become a reality.
Oil Prices
The oil market continued to churn due to supply and demand dynamics. Ukraine drone attacks that disrupted Russian refineries and some unrest in Libya helped underpin prices. Trump’s tariff threats on energy imports, combined with OPEC’s decision to stick to its plan to unwind production cuts, limited gains. The outlook for February will be determined by the U.S. and its tariff plans.
Bank 2024-USD/CAD Q4 2025-USD/CAD Q1
Scotiabank* 1.4300 1.4300
BMO 1.4400 1.4200
CIBC 1.4500 1.4600
TD Bank* 1.4500 1.4500
National Bank 1.4500 1.4500
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
