admin Experts warn of challenging months ahead for the Canadian dollar as it continues its downward trend.
Karl Schamotta, chief market strategist at Corpay, stated, “We have more room to fall.” The loonie has been trading below 70 cents US recently, marking a nearly 4% drop since September.
Schamotta anticipates a turbulent period for Canada, with uncertainty around U.S. president Donald Trump’s policy proposals dampening business investment and consumer confidence, contributing to a weaker loonie in the short term.
However, this is not the sole factor.
The outperforming U.S. economy, with rising yields outpacing those in Canada, is drawing more investments southwards. The growing policy gap between the Bank of Canada and the U.S. Federal Reserve further diminishes the loonie’s appeal to global investors.
Schamotta explained, “The Canadian dollar is much less attractive to global investors.”
The U.S. Federal Reserve recently enacted a quarter-percentage point interest rate cut and is expected to slow its rate cut pace next year to two instead of four.
Conversely, the Bank of Canada implemented its second consecutive large interest rate cut this month, reducing its key rate to 3.25%.
Adam Button, chief currency analyst at Forexlive, noted that these cuts occur as Canada’s economy shrinks on a per-capita basis. He also highlighted a worrying forecast: negative population growth in 2025.
“Population growth has been Canada’s sole economic driver for the past two years, and that’s about to reverse,” Button said.
Schamotta predicts the loonie will decline further in early 2025, followed by modest recovery later in the year. Rate cuts by the Bank of Canada should eventually reinvigorate the housing market and consumer activity, providing some support for the loonie towards the end of the year.
Nevertheless, looming tariff threats from Trump could keep traders cautious. Schamotta described the current sentiment as “sell-first-and-ask-questions-later,” adding, “The next few months are critical as we wait to see what Trump does.”
Button argued that the loonie’s struggles are largely tied to the U.S. dollar’s strength.
“A significant portion of the Canadian dollar’s weakness stems from U.S. dollar strength,” he said. For global investors, the U.S. remains the primary prospect for impressive growth in 2025.
“Until the U.S. economy falters, the Canadian dollar’s recovery remains unlikely,” Button said.
Historically, the loonie’s value has been closely linked to oil prices, given their significance to the Canadian economy. However, this relationship has weakened over time.
“The oil and gas investment cycle has ended and is unlikely to return soon,” Button explained. “Additionally, interest rate changes now play a greater role in shaping Canada’s economic outlook than oil exports.”
A weaker loonie may substantially impact import costs, raising prices for goods coming into Canada.
Button remarked that a weak Canadian dollar no longer benefits the economy as it once did.
“Previously, a lower loonie spurred manufacturing and exports,” he said. “That balance isn’t present in today’s currency dynamics.”
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