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Asset Watch
Friday, January 24, 2025
U.S. Inauguration Day has come and gone, and investors’ fears about potential tariffs may soon become a reality. And with Canada stuck on the wrong side of an ‘America First’ agenda, the loonie could record five consecutive losing months versus the U.S. dollar.
But, with one-sided positioning and expectations often a contrarian’s dream, could the CAD surprise the crowd and rally in 2025?
While further tariff talk will likely hurt the CAD in the short term, Stéfane Marion, Chief Economist at the National Bank of Canada, said on Jan. 9 that the U.S.’ “deficit is with Canada on energy, but Canada allows you to have access to energy at a discount that you refine or transform to sell at a higher price to the rest of the world.”
Moreover, Doug Porter, Chief Economist at Bank of Montreal, added, “The only reason why Canada runs a trade surplus is because it exports a lot of oil and gas to the U.S….. Even if Canada-U.S. trade were to miraculously balance in the next day, it would add one-tenth of a percent to U.S. GDP. It just is not that meaningful.”
Thus, while the algorithms may look to punish the CAD more, the fundamental realities are much less dire than the narrative suggests.
As the USD/CAD hovers near the 2016 and 2020 highs, the currency pair has not rewarded the USD bulls at these levels. The horizontal white lines are near intramonth and closing month resistance, and the CAD rallied sharply the last two times it reached these heights.
Similarly, the USD/CAD could record five consecutive winning months, which has only happened three times since 2009. As a result, Canadian dollar sentiment is about as bad as it’s ever been.
While the USD/CAD’s daily and weekly RSIs soared well above 70, its monthly RSI is approaching the key level. If you analyse the blue line at the bottom, you can see that the metric is near the highs that marked prior reversals.
Consequently, the data signals overheated enthusiasm that hasn’t been maintained historically.
Because the algorithms will likely jump at every tariff headline, volatility could be amplified as President Donald Trump unveils more of his agenda. Therefore, it could be a wild ride for those with shorter time horizons.
However, if you’re patient and willing to look out several months, history suggests now is a good time to buy the CAD.
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