Since the beginning of 2025, we've seen heightened volatility across various financial markets. To help you understand and navigate these dynamic conditions, ATB's Economics team has invited experts from our ATB Capital Markets Fixed Income, Currencies, and Commodities (FICC) team to guest author The Twenty-Four. The team will share their key perspectives on how to approach markets for the remainder of 2025 and effectively navigate future fluctuations. Today’s article was written by Bill Kellett. Bill is Managing Director and Head of Currencies at ATB Capital Markets, where he leads the firm's Foreign Exchange (FX) strategy and advisory efforts.

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 six months, including policy direction from the U.S. Administration, heightened geopolitical tensions, de-globalization, and shifts in capital flows. These drivers will have a lasting impact in the years to come. Today’s Twenty-Four 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 U.S. against multiple currencies. Anticipation of tariffs and strong language from the incoming U.S. 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 U.S. Administration were having a negative effect on the U.S. dollar (USD). The subsequent USD sell-off was driven by fears of rising U.S. inflation and falling growth expectations due to tariffs, causing foreign investors to begin diversifying away from U.S. Treasuries into other assets outside the U.S. This led to an 8.5% sell-off in USD/CAD, a 12% drop in the U.S. Dollar 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 U.S. 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. If we can help you gain insight into any of the topics discussed above, please do not hesitate to reach out to the ATB FICC team for more information. We are here to provide insight on everything impacting Alberta, Canada, and beyond!

Answer to the previous trivia question: Copper is seen as a leading indicator of economic activity and a barometer of global economic health. For this reason, it’s sometimes referred to as Dr. Copper.

Today’s trivia question: When did (what was then) the Province of Canada switch to a decimal-based currency (i.e., from pounds to dollars)?  

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