Canadian Dollar Looms Under Storm Clouds in 2025 FP Outlook

December 28, 2024February 6, 2025 moneymetrics.org_admin Economy

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Currency expert Karl Schamotta talks with Financial Post’s Larysa Harapyn about the loonie

As we navigate the complex world of currencies, it’s essential to understand the factors that influence exchange rates and how they impact our economy. In this article, we’ll delve into the current state of the Canadian dollar, also known as the loonie, and explore its trajectory for 2025.

The Loonie: A Troubled Past

In recent times, the Canadian dollar has been on a downward spiral against the US greenback. This decline is not new; in fact, it’s been a persistent trend over the past year. The loonie’s value has dropped significantly, and many are wondering what lies ahead.

Different Trajectories: Canada vs. the United States

According to Karl Schamotta, a currency expert, "the Canadian and US economies are pursuing very different trajectories." This divergence in economic paths is having a significant impact on exchange rates. The US economy has been growing steadily, with low unemployment rates and rising interest rates. In contrast, Canada’s economy has been sluggish, with slower growth rates and lower interest rates.

What Does this Mean for the Loonie?

The Canadian dollar’s decline against the greenback is largely driven by the differing economic paths of these two countries. With the US economy growing stronger, investors are flocking to the US market, causing the value of the loonie to drop. Additionally, the Bank of Canada’s (BoC) monetary policies have also contributed to the loonie’s decline.

The BoC’s Role in the Loonie’s Decline

The Bank of Canada has been actively trying to stabilize the economy by cutting interest rates. While this move may seem counterintuitive, it’s an attempt to boost growth and prevent a recession. However, this decision has had unintended consequences on the loonie.

How Low Can the Loonie Go?

Karl Schamotta believes that "the loonie could go even lower" if the Canadian economy doesn’t pick up pace. With the US dollar strengthening and interest rates rising, it’s likely that the loonie will continue to decline. However, this is not a foregone conclusion; there are factors that could influence the loonie’s trajectory.

What Lies Ahead?

So, what does 2025 hold for the Canadian dollar? Will it continue its downward spiral or stabilize? According to Schamotta, "the next few months will be crucial in determining the loonie’s fate." The economy is expected to grow slowly, and interest rates may rise. However, these factors alone won’t dictate the loonie’s value.

The Impact on Canadian Economy

As the loonie continues its decline, it poses significant challenges for Canada’s economy. With a weaker currency comes increased import costs, higher inflation rates, and lower purchasing power. This could have far-reaching consequences, including:

Higher prices for imported goods
Reduced competitiveness in international markets
Increased pressure on businesses to adapt to a changing economic landscape

The Verdict: Storm Clouds Ahead

Karl Schamotta’s assessment is stark: "storm clouds" are gathering over the Canadian dollar. The loonie’s decline has been significant, and unless there’s a substantial change in economic policy or growth rates, it’s likely to continue its downward trajectory.

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As we navigate this uncertain economic landscape, it’s essential to stay informed about the factors that influence exchange rates. The Canadian dollar’s decline against the greenback is a complex issue with far-reaching consequences for our economy.

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