The USD/CAD pair is closing 2024 with its strongest annual performance since 2015, marking a pivotal moment for the Canadian Dollar as it faces multiple economic and geopolitical pressures heading into 2025. This year’s rally saw the pair climb above the 1.4000 level for the first time since 2002, driven by a confluence of U.S. monetary policy shifts and heightened trade uncertainties.
A Year of Breakouts for USD/CAD
USD/CAD rose by 8.66% in 2024, the largest yearly gain since 2015. Much of this surge occurred in Q4, following Donald Trump’s re-election and subsequent tariff threats on Canadian imports. The possibility of a 25% tariff, coupled with concerns over border security, has injected significant volatility into the currency pair. While these threats may be negotiation tactics, they highlight a critical risk for the Canadian economy, as noted by Bank of Canada Governor Tiff Macklem during the December rate cut announcement.
The December rate cut, alongside these geopolitical tensions, solidified USD/CAD’s break above the 1.4000 mark—a level it had previously struggled to sustain in the past two decades.
Historical Trends and 2024’s Rally
Historically, USD/CAD has exhibited mean-reverting behavior, with two prior tests above 1.4500 resulting in reversals. The last significant rally occurred between 2014 and 2015, driven by the Federal Reserve’s first rate hikes since the Financial Crisis. In contrast, the 2024 rally unfolded during the Fed’s transition to a rate-cutting cycle, which began with a “jumbo” 50-basis-point cut in September.
The Q4 surge also coincided with the U.S. Dollar Index (DXY) reversing from oversold conditions, fueled by a falling wedge pattern and bullish RSI divergence. The USD/CAD rally gained further momentum after the U.S. election, with tariff threats and subsequent geopolitical developments propelling the pair higher.
Trump Tariff Risks and Market Reaction
President-elect Trump’s initial tariff threats in November triggered a sharp spike in USD/CAD, which briefly reversed but found support at the 1.4000 level. While Trump later softened his tone, referring to Canada as the “51st U.S. state,” the uncertainty surrounding trade relations continues to weigh on the Canadian Dollar. Markets have reacted with caution, pushing USD/CAD higher as investors brace for potential disruptions to U.S.-Canadian economic ties.
Looking Ahead: 2025 Outlook for USD/CAD
As 2025 approaches, key questions remain about the trajectory of U.S. trade policies and their impact on the Canadian economy. Historically, Trump has favored a weaker U.S. Dollar to boost American exports, as seen during his first term. However, his stance on tariffs and fiscal policies could introduce conflicting pressures, making the outlook for USD/CAD uncertain.
For now, technical indicators suggest further volatility. If USD/CAD sustains support above 1.4000, the pair could test previous highs near 1.4500. However, a de-escalation of tariff threats and a return to mean-reverting behavior could bring the pair back below key psychological levels.
In the broader context, the Canadian Dollar’s performance will also depend on domestic economic factors, including potential adjustments from the Bank of Canada and the country’s resilience to external shocks. With these dynamics in play, USD/CAD remains a critical pair to watch as 2025 unfolds.
