FICC Market Review: Currency Markets

2025 is shaping up to be a historical year for volatility, divergence, and uncertainty in Currency markets. There are countless drivers of price action over the past 6 months, including policy direction from the US Administration, heightened geopolitical tensions, de-globalization, and shifts in capital flows. These drivers will have a lasting impact in the years to come. This piece aims to provide clarity surrounding the path forward in Foreign Exchange (FX) markets for the balance of 2025 and beyond, gleaning insight from what we have already seen this year to help guide a general path forward. 

We rang in 2025 with a sharp rally in the US against multiple currencies. Anticipation of tariffs and strong language from the incoming US president led to uncertainty in all asset classes, and significant movement and volatility in FX markets. The tone changed dramatically as winter turned to spring, and it became apparent that the actions of the US Administration were having a negative effect on the US Dollar (USD). The subsequent USD sell-off was driven by fears of rising US inflation and falling growth expectations due to tariffs, causing foreign investors to begin diversifying away from US Treasuries into other assets outside the US. This led to an 8.5% sell-off in USD/CAD, a 12% drop in DXY Index, and a 16% rise in EUR/USD from their respective highs/lows. 

Interest rates, capital flow, and commodities will play a significant part in charting the path forward in currency markets, and currencies that will outperform or underperform accordingly. Volatility in currency markets has moved from extreme levels during the first half of 2025 to something that feels much more normalized. We still anticipate significant currency movement for the balance of 2025, but the pace will be less frantic than the first half of the year.

It has been a wild ride for the Canadian dollar (CAD), and there are signs of underlying challenges emerging in the Canadian economy. Stabilizing the Canadian economy is crucial to driving increases in capital investment, which in turn leads to support for CAD. Despite steps being taken to address potential challenges ahead, we do anticipate that CAD will underperform through the balance of 2025. 

However, CAD underperformance doesn’t necessarily mean USD/CAD is moving higher. While dramatic capital rotation out of the US is not a sustainable reality, the USD is showing signs of longer term systemic weakness. USD weakness will likely outpace CAD weakness, setting up for a move lower in USD/CAD. We anticipate USD/CAD will drift moderately lower over the second half of 2025, edging down to the low 1.3000’s. 

CAD will struggle against other currencies, such as the Euro (EUR), Great British Pound (GBP), and the Japanese Yen (JPY) through the balance of 2025. We are optimistic that capital inflows will eventually return to Canada through increased investment and increased focus on broadening our energy, manufacturing, and services sectors. If capital inflows return, the trend in the CAD crosses should reverse course by early to mid 2026. 

Elsewhere in the world, we will see continued volatility in most of the Major Currencies and the weaker USD trend will have an impact accordingly. We anticipate ongoing strength in EUR/USD, GBP/USD, AUD/USD, and weakness for USD/JPY. 

Markets are moving fast, and we will continue to see significant volatility and movement across asset classes. We expect the theme of USD weakness will continue through the balance of 2025, and this variable will be the main overarching factor impacting FX markets. 

As we zoom out throughout the week across this ATB Fixed Income, Currencies and Commodities series on various asset classes, we will identify an ongoing theme of uncertainty going forward, with a need to focus on timing and expert advice to help navigate the path forward. 

This article was originally published in The Twenty-Four.