Introduction

The Canadian dollar is set to face a tumultuous few months, with economists forecasting that its downward trajectory will continue. Karl Schamotta, chief market strategist at Corpay, emphasizes, "We do have more room to fall," highlighting the potential struggles the Canadian currency will encounter.

Current Performance

In recent weeks, the Canadian dollar has been trading below the significant threshold of 70 cents against the U.S. dollar, marking a decline of nearly four percent since September. The upcoming months are predicted to be particularly rocky, fueled by uncertainty surrounding the United States' economic policies, especially with the incoming administration of President Donald Trump. The anticipated changes in American policy are causing ripples in business investment and consumer confidence in Canada, leading to a weaker loonie in the short term.

Key Contributing Factors

Several key factors contribute to this concerning outlook. The robust performance of the U.S. economy is elevating U.S. yields, surpassing those in Canada, and attracting investors to the south. Additionally, the divergence in monetary policies between the Bank of Canada and the U.S. Federal Reserve is making the Canadian dollar less appealing to global investors.

Just last week, the Federal Reserve enacted a quarter-percentage point interest rate cut and is now projected to slow down its rate cuts next year, dropping from four cuts to just two. In stark contrast, the Bank of Canada recently slashed its key interest rate to 3.25 percent for the second consecutive time this month.

Economic Struggles and Demographic Trends

As the Canadian economy continues to struggle on a per-capita basis, Adam Button, chief currency analyst for Forexlive, points out concerning demographic trends. The Canadian government is forecasting a negative population growth by 2025, which could undermine the primary source of economic growth seen in the last two years, namely population increases.

Future Outlook

Looking ahead, Schamotta anticipates a continued decline in the Canadian dollar early next year, although a gradual recovery may be on the horizon later in 2025. He believes that the Bank of Canada's policy actions could revive activity in both the housing market and consumer spending, providing some support for the loonie towards the end of next year.

However, the looming threats of tariffs from Trump continue to weigh heavily on market sentiment, causing traders to adopt a “sell-first-and-ask-questions-later” mindset. "They're not going to wait around to see... and that's going to put downward pressure on the loonie," Schamotta stated.

Impact of the U.S. Dollar

Moreover, Button emphasizes that a significant portion of the Canadian dollar's struggles is attributable to the strength of the U.S. dollar. "Investors looking at the global landscape for 2025 see impressive growth primarily in the United States," he explains, indicating that Canada may remain at a disadvantage until the U.S. economy falters.

Oil Prices and Economic Dependency

The historical correlation between the Canadian dollar and oil prices has weakened over the years, as the investment cycle in the oil and gas sector appears to have reached its conclusion with no sign of revival. Button notes that today's economic outcomes for Canada are increasingly driven by interest rates rather than oil exports.

Conclusion

As the Canadian dollar trends downward, the ramifications could extend to imports, driving up costs for goods entering the country. Button warns that a weak loonie is no longer as beneficial for Canada as it once was, suggesting that the manufacturing and export industries do not depend on currency fluctuations as they did in the past.

In summary, the Canadian dollar is navigating a perfect storm of economic challenges that could lead to further declines. Investors, businesses, and consumers alike must brace for uncertain times and remain vigilant as they adapt to an evolving financial landscape.