After falling to its lowest level in four years last week, the loonie was slightly up Monday at 71.18 US cents. However, it remains lower than it was since the early days of the COVID-19 pandemic. It is also almost 4% lower than its September level.
Economist and chief director of economic studies at CIBC, Katherine Judge, expects the Canadian dollar to hover around current levels for the rest of the year.
“We haven't seen these levels in a long time. I think we have certainly crossed a level which is worrying, she mentions. There are many factors at play and a lot of uncertainty over the coming months.”
The loonie's fall comes as the U.S. greenback soars thanks to the re-election of former President Donald Trump, gaining ground not only against the Canadian dollar, but against a host of foreign currencies.
Mr. Trump has promised to impose tariffs on all American imports. Note that approximately 75% of Canadian exports are destined for the United States.
The Canadian dollar could fall further if it becomes clear that customs tariffs will be put in place, says Ms. Judge.
“But while it looks like we can negotiate our way out of these tariffs, it will be short-term weakness with some recovery next year — which is really our base case,” he said. she said.
The weakness of the loonie also reflects the divergence in interest rates between Canada and the United States.
The Canadian economy has not shown the same strength as that south of the border in recent months. Consequently, the Bank of Canada decided to lower interest rates more quickly than its American counterpart in an attempt to avoid a recession.
The interest rate gap between the two countries could widen further, depending on what President-elect Donald Trump does once in office.
“The general fear is that if the Canadian economy is hit by tariffs and our exports are very weak, the Bank of Canada will have to reduce its rates even further to support the national economy,” says Ms. Judge.
A bargain?
“But right now we don't know what the tariffs might look like. There are integrated supply chains between the United States and Canada, so it is not even in the interest of all American companies to impose tariffs on Canadian products,” she adds.
A weaker dollar can be a boon for Canadian companies that export to the United States, but it can hurt those that import goods and also make travel more expensive for Canadians.
And while there are always winners and losers on one side or the other of currency fluctuations, Ms. Judge believes the dollar is so low right now that the scales have tipped too far in one direction.
“You want the Canadian dollar to be low enough for businesses to invest in it and hire at competitive salaries, but you don't want it to be so low that we start importing inflation,” she concludes. .
