The Canadian and American economies often move together, but the loonie is the latest sign that won’t be the case this time. The Canadian dollar has been plunging against the US dollar, a.k.a. Greenback. That loonie’s erosion was amplified this month as the two central banks diverged on outlooks for their respective economies, with the American economy set to outperform the Canadian economy significantly. This kind of weakness hasn’t been observed outside of the deepest global recessions, and with Canada prioritizing non-productive investments—relief may not be around the corner.
A Weak Loonie May Not Boost The Canadian Economy This Time
Currency strength is an important economic lever, with a weak loonie having pros and cons. Advocates of a weak loonie against the greenback feel this helps make investment more attractive. Foreign companies essentially get a discount on everything from land to labor. Historically, this has helped revive real estate investment, and created well-paying jobs—notably with US tech giants, the film industry, and banking. However, a weak loonie isn’t a free ride.
This time may be different. The US economy is looking to rebuild its domestic industry by re-shoring the industries that were sent overseas in the previous 30 years. It’s a bi-partisan priority that the outgoing president embraced, and the incoming president plans to ramp up during his 4-years in office. Creating jobs in Canada due to a weak loonie doesn’t further that strategy; it’s directly at odds with it.
The US dollar is the unofficial global reserve currency, impacting the cost of nearly everything. Most commodities, such as lumber, steel, oil, and wheat, are priced in US dollars. Even if we produce those items, the greenback is still the currency it’s priced in since domestic and global consumption compete. Prices can stall, but an erosion in currency is going to mean it’ll cost more. The boost to the cost of living will be felt even if CPI doesn’t capture it.
A weak currency may attract foreign investment, but it places a drag on domestic investment in productivity. Machinery and equipment are often imported and priced in US dollars, and become more cost-prohibitive for domestic firms. A weak loonie may attract more foreign investments, but it comes at the cost of reducing domestic investment in productivity. An issue that’s already reached a crisis, according to the Bank of Canada.
Canadian Dollar Plunges To One of The Weakest Levels On Record
The loonie has taken a historic bloodbath typically only seen during a deep recession. Today’s market opened with US$1 worth C$1.444 (C$1 = US$0.69), marking the weakest loonie since 2003. It’s worth noting that CAD has only spent roughly 4 years this weak (or worse) in the past 40+ years. Nearly two generations have only briefly seen this level of weakness.
Source: Trading View.
Canada’s Economy Is Significantly Weaker Than The US
There are many reasons behind the weakness, with yesterday’s move driven by the FOMC, aka the US Federal Reserve (the Fed). Yesterday, the Fed slashed rates by 0.25 points and signaled to the market that further rate cuts may not be needed. A robust economy with low unemployment and re-accelerating inflation doesn’t require stimulus.
The Bank of Canada (BoC) made a very different move a few days prior. Canada’s central bank made a “supersized” cut to its key interest rate, a move typically only reserved for serious economic emergencies. That sent mixed signals to the bond market, which now has very different trajectories forecast for inflation and thus yields.
“Rate spreads, which drive the vast majority of performance, have widened drastically, and a more hawkish Federal Reserve dot plot only hurt sentiment further,” explains Robert Kavcic, senior economist at BMO.
Adding, “It’s a good thing Tiff & Co. communicated toward a pause last week.”
The bank also sees “political uncertainty” as a driving force around trade and parliament. The US tariff threats are unlikely to be fully realized, but uncertainty remains until the issue is resolved. In any case, even a relatively minor policy change would hit the Canadian economy.
A strong currency also requires strong leadership, and the world isn’t sure that Canada has it. “This week’s surprise resignation by the Finance Minister just reinforces the fragility of the current parliament,” explains Kavcic.
It didn’t help that a less-than-flattering Fall Economic Statement followed the Finance Minister’s resignation. Political factions may think this is debatable, but the market doesn’t. They see a lack of clarity on where the country is heading.
Since oil is typically priced in USD, exports tend to help bolster the currency’s strength. “Oil prices have been neutral through this latest selloff, but aren’t the driver of the Loonie that they once were,” explains the bank.
Ultimately, the issue boils down to the fact both economies are very different, despite what many think. Bluntly put, the US economy’s focus on productive investment is paying off with a stronger economy. Canada doubled down on non-productive investment and household credit expansion, a short-term solution that’s led to a much higher unemployment rate and cost of living—which is a deadly setup for most economies.
I feel like the gov speaking is what it must have been like in the late 30s. It disburses a “fact” then has to correct it, claiming the fact was incorrect.
They know the release has more impact than the revisions, and then they weaponized that fact.
50 cent loonie incoming. And just to be clear, Pierre can’t fix 30 years of nonproductive investment.
Canada would have to start subsidizing debt significantly, which would compound the issues before it makes them better.
I doubt they would let it get to that point, but I also thought in 2020 we we had the opportunity to write off some of the negative outcomes from a correction, but we used that period to double down on the insanity.
50 cent loonie and $1m condos. The joys of being a millennial in Canada right now.
They voted for it. Hopefully future generations will utilize a more educated vote when elections role around
Who’s going to vote in this nei-feudal world they’re building?
The government is the largest employer in Canada. No way they will want wages to rise in order to catch up to inflation since that would bloat their deficit.
The fall of the CAD can get disorderly at some point and will require interests to rise significantly to defend it. Rates will therefore have to go higher (think the unimaginable).
My sympathies with anyone locking in a new mortgage during this cutting cycle (Not).
The US rate will probably have to rise soon to cover their deficit. Trump taking over his economic ideas could start an economic crisis. The Canadian dollar fall will also mean rates going up so the problem will compound more than most people expect.
Chump ruining the economy will make rates decrease, not increase. When covid crashed everything, rates nosedived. It’ll be the same with chump destroying everything.
Yes, rates will decrease at first if he ruins the economy. But then as rates decrease, so does the dollar. And when the dollar goes down, inflation goes up. When inflation goes up, rates have to go back up to fight it. It is all very simple, yet also very brutal.
This time it can play out fast, really fast.
Rising US rates will not save the loonie. Their deficit can rise further, even to 40 trills. Plus, the rate differential will bring all currencies down together in a classic “beggar thy neighbor” fashion.
The US mothership is done pillaging the world and is now devouring it’s world war allies. Canada, UK, EU and Japan will all see their currencies lose purchasing power, right now slowly and then suddenly. Shame, did not have to be this way. Post covid, all could have reset relations with the global south, but no, they had to go back to resting on past laurels and doubling down on foolish mistakes of maintaining hegemony.
It was a good 100 year run but all things come to an end. Manifest destiny.
The state of the Federal government is abysmal. Refused to sell LNG to Japan , Germany. Want to cap oil production. Softwood lumber a problem. They have done everything and anything possible to drive Canada into the ground. We are not in a recession,this is a depression. BOC warned last spring, in case of emergency break glass. Canada is on the precipice of absolute financial disaster due to incompetence and creating policies that are harmful to the Country and the Citizens. Sock boi needs to step down immediately but he won’t. He seems to enjoy causing pain. As to US / Can relations , 2 very different economies and an incoming President that does not tolerate the ideals the current regime has pressed onto citizens here. Trump will eat Canada for lunch and we are in for a world of hurt until adults take over to begin repairing the Country. This will take a few decades at least. Maybe it would’ve helped had the PM given Trump a friendship bracelet. NOT.
What a s*%# show.
This is worse than when his father ran the country into the ground…
Canada’s golden goose is real estate.
For the sake of the economic security and well-being of the country the interest rates must be cut faster.
Many depend on their home prices to rise to survive. Bank of Canada do the right thing and drop rates to zero NOW
The golden goose has stopped laying its eggs. We need wages to rise, not real estate prices causing a spike in CPI.
You must be a delusional real estate broker laying bricks right now.