Feb. 13, 2013, was a day to remember, even if it didn’t seem particularly remarkable at the time.
Sure, it was just before Valentine’s Day, and people were making plans for a romantic dinner or drink somewhere. Some folks also tuned in to watch the Toronto Raptors beat the New York Knicks 92-88.
But the most historic part of the day, in retrospect? It was the last time the loonie was on par with the American dollar, even though it slipped below water to close the day at 99.80 cents U.S.
Don’t count on the Canadian dollar coming back to par with the greenback any time soon — especially not in 2025.
A stronger U.S. economy, president-elect Donald Trump’s threats of 25 per cent tariffs on Canadian and Mexican imports, and Bank of Canada interest rate cuts are all reasons our currency likely won’t be getting much stronger over the next year, foreign exchange experts and economists say.
“Never say never, but without something fundamental changing, it’s really hard to see happening,” said CIBC chief economist Avery Shenfeld of the prospect of the loonie reaching parity with the U.S. dollar again.
The loonie started out 2024 at 75.10 cents (U.S.) and had slumped to 69.78 cents by Dec. 18. And it could be another rough year ahead, said Shaun Osborne, chief foreign exchange strategist at Scotiabank.
“It’s going to be hard to see the Canadian dollar turning around any time soon,” said Osborne. “It seems quite likely the Bank is going to persist with interest rate cuts.”
With interest rates higher in the U.S., investors looking for better returns park their money into U.S. investments, fuelling demand, and price, of the greenback, CIBC’s Shenfeld explained.
“It’s the flow of funds. People are looking for those higher yields,” said Shenfeld. “They just look more attractive.”
The Bank of Canada’s key overnight rate was cut five times in 2024, to its current 3.25 per cent from five per cent.
The U.S. Federal Reserve’s fed funds rate — the American equivalent to the Bank of Canada’s overnight rate — is currently set at a range of 4.5 to 4.75 per cent, meaning the spread between Canadian and U.S. rates is as high as a 1.5 percentage points.
A year ago, before the Fed and the Bank of Canada started cutting to stimulate their respective economies, the overnight rate was at five per cent, and the Fed Funds rate was set at a range of 5.25 to 5.5 per cent, meaning the spread was as low as a quarter of a percentage point.
The Bank of Canada raised interest rates 10 times between March 2022 and last summer in a bid to wrestle inflation down to its two per cent target. Inflation peaked at 8.1 per cent in June, 2022 as the Canadian economy opened up from COVID-related restrictions. In October, Canada’s annual rate of inflation was at two per cent, right in the middle of the Bank’s one to three per cent target range.
The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving down prices and slowing the economy.
Now, as the economy slows and inflation has been heading mostly downward, the Bank is taking the reverse approach, trying to stimulate growth by cutting rates.
While there’d be some short-term damage to the loonie’s prospects if the tariffs are implemented, the longer-term damage to the Canadian economy could prove to be even greater, said Bipan Rai, managing director at BMO Global Asset Management.
“If they do stay at 25 per cent and they’ve got some staying power, say beyond a five-year horizon, that’s a huge headwind for the Canadian economy over the long-term,” said Rai, a long-time foreign exchange strategist.
With that level of tariffs on imports, companies looking to reach American consumers with their goods would be nowhere near as tempted to locate factories or other significant parts of their supply chains in Canada, Rai said.
“Businesses would have to make decisions about their investments over the medium to long-term, and that has implications, not just for the currency, but for the way the Canadian economy’s configured,” said Rai.
Even in the shorter term — over the next few quarters — the Canadian economy is still expected to be weaker than our southern neighbours. And that means, said Rai, that the Bank of Canada would be more inclined to keep cutting.
“It’s certainly a more dynamic economy in the U.S., relative to Canada,” said Rai.
