Economists say more room to fall as Canadian dollar continues downward trend

Article content

Experts say that the next few months will be difficult for the Canadian dollar, as it appears set to continue its downward trend.

Article content

Article content

“We have more room to go down,” said Karl Schamotta, chief market strategist at Corpay.

The Canadian dollar has been trading at less than 70 US cents in recent weeks and is about four per cent lower than it was in September.

Shamuta expects the coming months to be a “very turbulent period for Canada” as uncertainty caused by incoming US President Donald Trump’s policy proposals impacts business investment and consumer confidence – meaning a weaker Canadian dollar in the short term.

Article content

However, this is not the only factor at play.

The superior performance of the U.S. economy, which pushes U.S. yields higher — much higher than those in Canada — attracts more investment south of the border. There is also a growing divergence in monetary policy between the Bank of Canada and the US Federal Reserve, Shamota said.

“This means that the Canadian dollar is much less attractive to global investors,” Shamota said.

The US Federal Reserve cut interest rates by a quarter of a percentage point last week, and is now expected to slow the pace of its cuts next year to two of the four cuts previously estimated.

Meanwhile, the Bank of Canada cut interest rates for the second consecutive time this month, bringing the key interest rate to 3.25 per cent.

Adam Paton, senior currency analyst at Forexlive, said the series of interest rate cuts comes as the Canadian economy continues to contract on a per capita basis.

He added: “In 2025, the government expects negative population growth. Population growth has been the sole source of Canada’s economic growth for the past two years, and that’s about to go into reverse.

Article content

Article content

Shamuta expects a further decline in the first months of next year and a modest, gradual improvement in the Canadian dollar during the remainder of 2025.

He said the Bank of Canada’s interest rate cuts will ultimately rejuvenate activity in the Canadian housing market as well as among Canadian consumers.

“That should help support the Canadian dollar a little towards the end of next year,” he said.

But as Trump’s tariff threats unfold, Shamota said traders are in “sell first, ask questions later” mode.

“They are not going to wait and see… and that will put pressure on the Canadian dollar,” he said.

“The big challenge here is the next few months, waiting to see what Donald Trump does,” he said.

Patton pointed out that Al-Kindi’s story is actually about what is happening south of the border.

“A large part of the weakness of the Canadian dollar is due to the strength of the US dollar,” he said.

He added that investors looking at the global landscape in 2025 “see only one country where we may achieve impressive growth, and that is the United States.”

Although this has been the trend for several years, Patton said: “Until the US economy falters, I don’t see a real chance for the Canadian dollar to correct itself.”

Article content

The Canadian dollar has historically been closely linked to oil, due in large part to the outsized influence of oil on the Canadian economy, but this relationship has weakened over the years.

He said that the investment cycle in the oil and gas sector has ended and it does not appear that it will return anytime soon. “Second, Canada’s overall economic outcome is determined more by changes in interest rates than by changes in (oil) exports.”

A weak Canadian dollar could have a significant impact on imports, raising the cost of products coming into Canada.

Patton said a weak Canadian dollar is not as good for the Canadian economy as it used to be.

He noted how the decline in the Canadian dollar had previously led to a recovery in the manufacturing and export sectors.

“That is no longer the case,” he said. “You don’t have that built-in currency balance like you did before.”

This report by The Canadian Press was first published Dec. 24, 2024.

Article content