Experts predict challenging times for the Canadian dollar in the months ahead as the currency continues its downward trend.
“We do have more room to fall,” said Karl Schamotta, chief market strategist at Corpay. The Canadian dollar has been trading below 70 cents USD recently, nearly 4% lower than its value in September.
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What’s Behind the Weakening Canadian Dollar?
Schamotta points to multiple factors contributing to the loonie’s decline. The incoming U.S. president Donald Trump’s policy proposals are creating uncertainty, dampening business investment and consumer confidence in Canada. These issues, coupled with an outperforming U.S. economy, are making the Canadian dollar less attractive to global investors.
Diverging Monetary Policies
A key driver of the loonie’s weakness is the growing gap in monetary policies between Canada and the United States. While the U.S. Federal Reserve recently delivered a quarter-point interest rate cut and is slowing the pace of future cuts, the Bank of Canada (BoC) has enacted two consecutive outsized rate cuts, bringing its key rate down to 3.25%.
“This widening differential in monetary policy is pushing investments south of the border,” said Schamotta. Higher U.S. yields compared to Canada’s are attracting global capital to the United States, further pressuring the loonie.
Economic Challenges and Population Decline
Adam Button, chief currency analyst for Forexlive, highlighted deeper economic concerns for Canada. He noted that the Canadian economy has been shrinking on a per-capita basis, with forecasts for negative population growth in 2025.
“Population growth has been the only source of Canadian economic growth in the last two years, and that’s about to go into reverse,” said Button.
Short-Term Pain, Long-Term Recovery?
Schamotta predicts the loonie will face a further decline in early 2025 but sees a modest recovery later in the year.
“The BoC’s rate cuts will eventually stimulate activity in the housing market and among Canadian consumers, providing some support to the loonie by year-end,” he said.
However, traders remain cautious as Trump’s tariff threats loom. “They’re in a sell-first-and-ask-questions-later mode,” said Schamotta, adding that uncertainty around Trump’s policies continues to weigh heavily on the currency.
The Impact of U.S. Dollar Strength
Button emphasized that much of the loonie’s weakness is tied to the strength of the U.S. dollar.
“Investors see the U.S. as the only country poised for impressive growth in 2025,” he said. “Until the U.S. economy stumbles, the Canadian dollar will struggle to regain ground.”
Oil’s Waning Influence on the Loonie
Historically, the Canadian dollar has been tightly correlated with oil prices, given the commodity’s significant impact on the Canadian economy. However, this relationship has weakened over time.
“The investment cycle in the oil and gas sector has ended and isn’t likely to return soon,” said Button. He also noted that interest rate changes now have a more substantial impact on Canada’s economy than oil exports.
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Consequences of a Weaker Loonie
The weakening Canadian dollar is likely to increase the cost of imports, raising prices for goods coming into Canada. Button also warned that the benefits of a weaker currency, such as a boost to manufacturing and exports, are no longer as significant as they once were.
Looking Ahead
While the Canadian dollar is expected to face significant challenges in the coming months, experts remain cautiously optimistic about a gradual recovery in 2025. In the meantime, global investors will keep a close eye on U.S. economic performance and Canadian monetary policy for signs of a potential turnaround.
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