Canadian Dollar's Potential Decline: Assessing ING's Bearish Outlook and Hedging Strategies

The Canadian dollar (CAD) has become a focal point for currency traders and investors in 2025, as ING’s bearish outlook highlights a confluence of economic, geopolitical, and monetary policy risks. With CAD underperforming against G10 peers and facing structural headwinds, understanding the drivers of its decline—and how to hedge against them—is critical for navigating this volatile environment.

Deteriorating Economic Fundamentals

Canada’s economic outlook has darkened significantly, with ING citing a record current account deficit and declining exports to the United States as key culprits [1]. These trends have raised alarms about a potential 0.7% annualized contraction in Q2 GDP, signaling a weakening export-dependent economy [1]. The Bank of Canada (BoC) is now projected to cut rates earlier than anticipated, with two reductions expected in 2025 and a terminal rate of 2.25% by 2026 [1]. This dovish pivot contrasts with the U.S. Federal Reserve’s delayed rate-cutting cycle, creating a policy divergence that further pressures CAD [1].

Trade Tensions and Political Uncertainty

The risk of a U.S.-Canada trade war looms large, with potential 25% tariffs on Canadian exports threatening to exacerbate CAD’s decline [1]. Such tariffs, if implemented, could trigger a self-reinforcing cycle of depreciation and protectionist rhetoric, particularly under a Trump administration [1]. While a Conservative government in Canada under Pierre Poilievre might ease tensions, the sectoral link between natural resources and CAD means any trade disruptions could amplify currency volatility [3].

Hedging Strategies for Traders

Given these risks, traders are adopting dynamic hedging strategies to mitigate exposure. Forward contracts allow businesses to lock in exchange rates, shielding against CAD/USD swings [1]. For example, Canadian producers with U.S. dollar-denominated contracts can use CAD/USD futures to hedge against an appreciating CAD [2].

CAD-denominated bonds have also emerged as a strategic asset, leveraging yield differentials with U.S. Treasuries to offset CAD depreciation [1]. Meanwhile, aggressive short positions in CAD/USD via futures or inverse ETFs are gaining traction, with a target of 0.72 USD/CAD by year-end 2025 [3].

For longer-term hedging, shifting USD exposure into U.S. Treasuries or dividend-paying equities offers protection against CAD weakness [3]. Additionally, speculative short positioning in CAD/USD futures has reached record levels, suggesting further downward potential in the near term [1].

The Path Forward

ING’s analysis underscores that CAD’s challenges are structural, not cyclical. While a fully depreciated CAD might temporarily ease trade tensions, the broader economic and policy headwinds suggest sustained bearish pressure. Traders must remain agile, balancing short-term hedging with long-term positioning in assets uncorrelated to CAD volatility.

Source:

[1] ING maintains a bearish outlook on the Canadian dollar.
[2] From Field to Forex: Hedging Your Harvest from Exchange ...
[3] CAD Outlook: Trade turbulence offers contrarian opportunity to hedge USD exposure