- Strong jobs data signals economic strength, but policy divergences with the United States will weigh on the Canadian dollar.
- The jobs numbers’ positive impact on the dollar is offset by similar employment gains in the US.
- Political uncertainty in Canada may amplify the impact of Trump’s policies, further pressuring the Canadian dollar.
The Canadian economy may have closed out 2024 with a surge of new job creation, but that may not be enough to breathe life back into the deflated Canadian dollar.
While the recent strong December jobs report could lead the Bank of Canada to slow or even pause its interest rate cuts, the path to lower rates seems more intact in Canada than in the US, where the economy (and the jobs picture) is healthy. Couple that with the potential for trade friction between the US and Canada, and continued declines in the Canadian dollar look likely.
“When you have a situation where data from both economies are equally good, the US dollar usually wins,” explains Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets. “We suspect this would limit how much the Canadian dollar can strengthen against the US dollar, especially in the face of tariff risks from the incoming Trump administration.”
Canadian Dollar to Stay Lower for Longer
The Canadian dollar had a turbulent 2024. It started at C$1.33 against the US dollar and slid steadily throughout the year, ending at a two-decade low of C$1.44 (an 8% decline). Currency watchers see more pain for the loonie in 2025.
The Canadian central bank cut 175 basis points from its overnight interest rate last year, outpacing its southern counterpart by 100 basis points. The Bank’s rate now sits at 3.25%, while the US Fed is at a target range of 4.25%-4.50%. Experts highlight this divergence as one of the most concerning risks to the Canadian currency in the new year.
“The Bank of Canada is paying more attention to interest rate differentials as a driver of the currency weakness, but it is not yet at the point of being concerned,” asserts Tiago Figueiredo, macro strategist at Desjardins. However, he cautions that as Canadian policymakers continue to cut rates, the most likely scenario for the loonie in 2025 is further weakening.
While the Canadian economy added 91,000 jobs in December (the highest monthly figure in two years), most economists expect the central bank to still move forward with a quarter-point rate cut at its next meeting on Jan. 29. This would further widen its policy differential with the US Fed, as a strong jobs report south of the border further cemented expectations of it standing pat on rates.
The loonie’s fortunes are closely tied to interest rates, according to Philip Petursson, chief investment strategist at IG Wealth. “The jobs data only matters on how it might alter rate expectations,” he says.
“The reality is that the US dollar is facing a lot of major tailwinds right now, [including] stronger-than-expected data, a Fed that is slower to ease interest rates, and an incoming administration that is expected to deliver on its America-first policy, including tariffs,” explains Ying.
Ying expects the divergence between the two currencies to widen in the first 100 days of US President-elect Donald Trump’s second term. She forecasts that the Canadian dollar could fall to C$1.46 against the greenback by the end of the second quarter “on higher headline risk and higher uncertainty.”
Job Burst Won’t Quite Stem Loonie’s Decline
The hotter-than-expected jobs print hasn’t changed rate expectations in Canada or the US. “Our base case expects the policy gap between the Bank of Canada and the [US] Fed will continue to widen to more than 200 basis points by mid-2025,” says Royal Bank of Canada economist Claire Fan. Since the situation remains fluid, for the moment, she focuses more on the direction rather than the extent, calling for “moderate additional Canadian dollar weakness over the first half of this year, with risks tilted toward bigger depreciations.”
Ben Jang, portfolio manager at Nicola Wealth, strikes a contrasting note. He stresses that a resurgent jobs market signals a healthier economy, which could influence policymakers to take their foot off the pedal for the time being. “With stronger jobs data, the market will have more confidence in the Bank of Canada migrating to a more measured approach to interest rate cuts, closing the rate differential with the US,” he says.
In the short term, Jang thinks this shift might lead to an increase in the value of the loonie as markets perceive it to be more stable than other currencies.
Key Risks to the Loonie Outlook
Fan thinks the risks are for more downside on the Canadian dollar. Things could get worse as the divergence in economic conditions grows beyond what is expected due to looser fiscal deregulation stateside and trade disruptions due to potential tariffs.
Prime Minister Justin Trudeau’s resignation, announced mere weeks before Trump takes office in the US, has created a perfect storm of political and economic uncertainty. “Canada is sailing into the trade maelstrom nearly rudderless, with [Trudeau] resigning and proroguing Parliament until March 24, with an election widely expected to soon follow, likely in early May,” BMO chief economist Douglas Porter explained in a note to investors. “The Canadian dollar is not taking all this news lying down—more like falling down, as it has now sagged by more than 4% since the US election to C$1.44 against the US dollar.” Moreover, he says, the Canadian dollar got little help from the strength in domestic jobs data.
Royal Bank of Canada analyst Nathan Janzen thinks a bigger interest rate gap with the US Fed could mean a further softening of the loonie is still in the cards, but he adds that “we don’t expect that will stop the Bank of Canada from cutting interest rates.” The underlying reasoning is that a softer Canadian dollar driven by a weak economic backdrop isn’t enough to cause a spike in inflation. “The disinflationary impact of an underperforming economy will outweigh the impact of higher import costs for the smaller share of consumer spending imported from abroad,” he reasons.
Jang remains optimistic that the strength of the December jobs print could help close the policy gap with the US and stabilize the loonie.
Bradley Saunders, North America economist at Capital Economics, believes the recent bounce in jobs numbers increases the odds that the Canadian central bank may not cut rates at all at its Jan. 29 meeting. Nevertheless, he insists that “given the weakness in private sector hiring, as well as political and trade uncertainty, we still think a 25-basis-point cut is the most likely outcome.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
