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.
Canadian Dollar in 2025: What Lies Ahead?
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