(Bloomberg) -- The Canadian dollar could fall further if US President-elect Donald Trump’s threat to put 25% tariffs on goods from the country materializes, CIBC said, but the second half of 2025 will likely provide relief to the loonie.

Sarah Ying, head of FX strategy at CIBC Capital Markets, said the Canadian dollar could test its pandemic-era low of C$1.4668 if the tariff is ultimately imposed.

“The bark generally is almost always worse than the bite when it comes to these types of announcements,” she said during a webinar on Tuesday. “Ultimately, we do think that Trump will use this as a negotiating tool as opposed to generally implementing these tariffs.”

Foreign exchange markets whipsawed after Trump said late on Monday that he would enact 25% tariffs on Canada and Mexico when he takes office. The loonie fell to a four-year low of C$1.4178 per USD shortly after 8 p.m. Toronto time on Monday before paring those losses.

In a client note, Skylar Montgomery Koning at Barclays Plc expressed a bearish outlook on the loonie. “Our analysis shows that a 10% tariff on all imports from Canada would result in 8% CAD depreciation,” she wrote. “Using this same analysis, a 25% tariff implies CAD depreciation of 19% to USD/CAD 1.63.”

Even before Trump’s tariff threat, traders had little faith in the loonie.

“Enthusiasm to short the CAD hasn’t been this extreme almost ever,” Ying said. “If market participants are forced to cover their CAD shorts, we could see a more amplified move lower in USD/CAD, and hedging does provide some protection against these unexpected positioning unwinds.”

She warned that any carry unwind on the dollar leg — even involving non-Canada currencies — will still affect USD/CAD.

In general, “factors driving the dollar will be more impactful than factors driving any other currency” over the next year, Ying said.

Her team said the 1.4% rise in USD/CAD following the tariff announcement was “not abnormal for a single day, especially given the much larger impact to trade this time around.”

Ying said the market’s meager expectations for the loonie could prove a positive.

“Sentiment on CAD right now is so bad that everyone is short, so the threshold for disappointment is actually very low,” she said. “It would only take a string of good data in Canada or bad data out of the US to impact positioning.”

Ying also believes lower interest rates will bolster Canada’s growth and GDP per capita by the second half of 2025, and the Trump trade will lose steam.

“Ultimately, over the longer time horizon, we do think USD/CAD will fall below the C$1.40 threshold again,” with CIBC predicting it will finish 2025 around C$1.37.

That falls within the scope predicted by the other large Canadian banks, which ranges from Bank of Nova Scotia’s estimate of C$1.30 to C$1.41 from Royal Bank of Canada.

--With assistance from Carter Johnson.

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