Loonie lags as U.S. booms - Western Producer

January 9, 2025 Western Producer

By Robert Arnason

WINNIPEG — A chart of the loonie’s value in 2024 shows that something changed in early October. For the first nine months of the year, the Canadian dollar was trading between 72 and 74 cents American.

On Oct. 1, the loonie was valued at 74.1 cents relative to the U.S. dollar. It then sharply declined, dropping 6.8 per cent in only three months.

A foreign exchange expert in Toronto said the loonie was “vulnerable” to this decline because of the weakness of the Canadian economy.

“The overall level of activity in the economy has slowed quite dramatically. That put is in a vulnerable position,” said Karl Schamotta, chief market strategist with Corpay, which helps companies move money internationally and manage the risk.

The weakness had been growing under the surface, and a catalyst was needed to trigger a sell off. It turned out to be the surprising strength of the U.S. economy, which outperformed expectations in 2024 and prompted the U.S. Federal Reserve to maintain interest rates at a higher level.

Meanwhile, the Bank of Canada continued cuts to its key interest rate in the second half of 2024.

“The gap between Canadian and U.S. interest rates has widened out to the highest level since the ’80s,” Schamotta said, which put pressure on the value of the loonie.

That pressure was significant as traders sold the Canadian dollar and put their money elsewhere.

“December closed at the lowest price (for the loonie vs. the U.S. dollar) in 21 years. That’s pretty significant,” said Trent Klarenbach, a grain market analyst and adviser who runs Klarenbach Research in Saskatoon.

That’s a snapshot of what happened in 2024, but consumers and farmers are more interested in the loonie’s trajectory in 2025.

Financial institutions have projected that the U.S. dollar will stay strong in the first half of 2025, but the loonie could rebound in the last two quarters of the year. That logic is partially based on the idea that interest rate cuts will stimulate the Canadian economy, which will support the loonie.

Like most market watchers, Klarenbach doesn’t see a scenario where the Canadian dollar hits 75 or 77 cents. The only trigger for that would be a spike in oil prices, which seems unlikely at this time.

“What’s going to happen in the second quarter (of 2025) is anyone’s guess, but I do think we can get a rally from the 70 cent levels and back to 72.”

Schamotta expects the U.S. dollar will remain strong in the first months of 2025, but there’s a possible scenario where the American economy slows down and the Federal Reserve responds with a cut to interest rates.

As well, a change in government in Canada should be supportive of the loonie.

“Markets at this point are convinced that (federal Conservative leader Pierre) Poilievre will emerge victorious…. What that (potentially) will do to the economy is already priced into the currency,” Schamotta said.

There is also the looming question of tariffs.

Traders don’t expect that U.S. president-elect Donald Trump will impose a blanket 25 per cent tariff on all goods from Canada, Schamotta said.

However, the risk to Canada’s economy is so great that “traders are in sell-first-and-ask-questions-later mode.”

A lot depends on the relationship between Trump and Poilievre. If that relationship goes well, the loonie could rebound.

“The assumption that markets are making is that Poilievre and Trump will get along better than Trump and Trudeau,” Schamotta said.

“That seems like a fair assumption … but it’s not a certainty