The Canadian dollar is hovering near a 14-month low against its US counterpart, stuck around 1.42 per US dollar as traders grapple with a mix of trade-policy uncertainty and shifting interest-rate expectations. The loonie, as Canada's currency is known, has barely budged over the past week, lingering close to the recent low of 1.4248.
What's behind the loonie's weakness?
Two main forces are pulling the Canadian dollar lower. The first is politics: the United States has signaled it wants changes to the United States-Mexico-Canada Agreement (USMCA), the trade pact that replaced NAFTA. Wells Fargo Securities, a major US banking firm, noted that such uncertainty can hang over a currency for months by denting business confidence and discouraging cross-border investment. When companies are unsure about future trade rules, they may delay spending or hiring, which can slow economic growth and reduce demand for the local currency.
The second factor is the economic backdrop. Canada's economy has been growing more slowly than the US economy, which makes the loonie less attractive to investors. Meanwhile, the US dollar has been supported by relatively strong US data and expectations that the Federal Reserve will keep interest rates higher for longer. However, recent softer US jobs data has cooled those expectations, which typically weakens the dollar. That dynamic has provided some support for the loonie, but not enough to lift it out of its slump.
Trade talks and the USMCA factor
The USMCA, which came into effect in 2020, is up for a mandatory review this year. The US has indicated it wants to renegotiate certain provisions, including rules of origin for automobiles and digital trade. Canada and Mexico have pushed back, creating a standoff that could drag on for months. The uncertainty is particularly damaging for Canada because about 75% of its exports go to the US, making trade policy a critical driver of the economy.
This isn't the first time trade tensions have hit the loonie. During the original NAFTA renegotiations in 2017-2018, the Canadian dollar fell sharply as investors priced in the risk of a breakdown in talks. The current situation is less dramatic, but the uncertainty is still weighing on the currency.
What it means for investors
For everyday investors, a weaker Canadian dollar has mixed implications. If you hold US stocks or ETFs, your returns get a boost when you convert them back to Canadian dollars. But if you're planning a trip to the US or buying goods priced in US dollars, your purchasing power is reduced.
For Canadian investors with a diversified portfolio, the loonie's slide can actually be a tailwind for international holdings. Many Canadian pension funds and mutual funds have significant exposure to US assets, and a weaker loonie increases the value of those holdings in Canadian-dollar terms.
On the flip side, a persistently weak loonie can fuel inflation in Canada by making imports more expensive. That could force the Bank of Canada to keep interest rates higher than it otherwise would, which would be a headwind for Canadian stocks and bonds.
What to watch next
Investors will be watching two key things. First, any news on USMCA negotiations could trigger sharp moves in the loonie. A breakthrough would likely send the currency higher, while a breakdown could push it toward 1.45 or beyond.
Second, the Fed's next moves matter. The recent cooler US jobs data has reduced expectations for further rate hikes, which has weakened the dollar broadly. If that trend continues, it could provide some relief for the loonie. However, if the US economy remains strong and the Fed stays hawkish, the loonie could stay under pressure.
For now, the loonie is in a holding pattern, caught between trade uncertainty and shifting rate expectations. Investors should brace for more volatility in the weeks ahead.
