Today I spoke with BNNBloomberg about the Canadian dollar, tariffs and why there could be a black swan looming around the US dollar. The video is below.
Here are five questions:
1) Why is the Canadian dollar struggling?
his week the Canadian dollar fell to the lowest level since May 2020. Excluding the pandemic and a brief rout in 2016, it’s the lowest in 21 years.
Now, it’s not entirely fair to say the loonie is struggling in a global context. It’s right in the middle of the five-year range against the euro, slightly below the five-year average against the pound and near a 15-year high against the Japanese yen.
Still, it’s weakened lately and there is one main domestic driver:
- Interest rates are working as intended, slowing the economy. If anything, the weakness is falling too hard on real estate and that’s elevating risks around housing, with Toronto condos looking particularly ripe for a rout. The spring housing market is likely to set the tone for the loonie next year.
So what's coming? More interest rates cuts that will weigh on the loonie.
If you ignore the context of a period of elevated inflation, the overnight rate at 3.75% is far too high for the momentum in the economy and the looming challenges. The market is pricing in a 78% chance of a 25 bps cut in December and a 22% chance of 50 bps. The central bank would be wise be more aggressive but that invites further CAD weakness.
2) How is the Canadian consumer doing?
Surprisingly good. The September retail sales report showed a 0.4% monthly rise with the early indicator for October at +0.7%. The better numbers were backed up by private surveys as well.
It’s a bit of a puzzle why consumers have held up so well despite high rates. There are two theories:
- The wealth effect. Yes, mortgage rates are higher and that’s squeezing over-leveraged Canadians but those with lower mortgage balances saw home prices double over five years and that’s leading to a spending dividend.
- Population growth. We learned from parliament this week that there are 4.9m people on expiring visas in the next 13 months. We’ve also gotten confused reporting about how many people are actually in this country. There is a very real possibility that we’ve undercounted and the extra population is helping to keep spending elevated.
3) What does the reversal in population growth mean?
The tough question for the loonie is how many people will be leaving the country from those 4.9 million? I don’t think many analysts in telcos or banking have a drop of anywhere close to that number in their models. If they do leave, what does it mean for rents? For housing? For consumption?
To some extent we’re flying blind here but I expect in the next 12 months we will get those answers and some sense of where population is heading in the future. It’s increasingly clear to me the upcoming election will be fought over immigration but it’s less clear where it’s headed or what the actual number of immigrants in the country is.
4) What about tariffs?
The Canadian dollar plummeted on Monday after Trump’s tariff threat. But more telling is how it’s nearly completely recouped that decline, despite falling oil prices.
A big reason why is that it doesn’t look like a serious threat and even if it is, it’s not an economic threat. Trump wants Canada and Mexico to stop illegal immigration and drugs. Canada has already gotten to work on the border, with illegal crossings down 60% since the summer. That work will continue but it’s solvable and the economic costs to Canada to solve them are negligible. So there is an optimistic outcome here where Canada appeases Trump and retains tariff-free trade while the White House turns his gaze to the rest of the world. That could result in Canada having a preferential trading position. Even in 2026, when Trump has threatened to reopen NAFTA (or the USMCA), the main issue appears to be trans-shipping, which also has a low economic cost for Canada to fix.
5) Why is the US dollar slipping this week?
Trump has a series of goals: 1) Stronger US growth, 2) The fiscal deficit falling to 3% from 7% of GDP 3) A much-improved trade deficit 4) A rising stock market.
Tariffs won’t accomplish these but here’s what could (at least in nominal terms): A weaker dollar.
Incoming Treasury Secretary Scott Bessent has alluded to using tariffs as a threat to trigger a revaluation, particularly against the Chinese yuan. Given the broad strength of the dollar, there are other parts of the world that would also welcome measures to weaken the dollar, including Japan and possibly Europe.
It would be something out of left field but Bessent was making monthly trips to Japan during the Abenomics period of major yen weakening and it left an impression on him.
