Synopsis:

ANZ highlights that USD/CAD will continue to reflect a sizeable "tariff premium" due to 25% US tariffs on Canadian imports starting 1 February. While trade uncertainty and BoC easing weigh on the CAD, potential H2 recovery could offer longer-term support.

Key Points:

1. Tariff Premium Pressures CAD:

   • The announcement of 25% tariffs on Canadian imports is expected to keep USD/CAD elevated, with trade uncertainty maintaining downside risks for the CAD in the near term.

2. Domestic Factors Add to CAD Weakness:

   • Political turmoil and an aggressive BoC easing cycle have contributed to CAD's underperformance in 2025 so far.

3. Potential for CAD Support in H2:

   • Canadian economic data has shown signs of resilience, with a surprise drop in unemployment to 6.5% in December.
   • ANZ suggests the advanced BoC easing cycle may enable Canada to recover faster than other economies, potentially supporting the CAD later in the year.

Conclusion:

Near-term trade uncertainty and US tariffs will sustain upward pressure on USD/CAD. However, improving domestic economic conditions and a more advanced easing cycle may provide support to the CAD in H2 2025, offering a potential medium-term rebound