Canadian Dollar Faces Pressure Amid Economic Challenges

TORONTO, Canada — The Canadian dollar remains one of the weakest currencies in the G10 this year, impacted by various structural weaknesses in the economy. High debt levels, low productivity, and a shaky housing market are contributing factors, according to analysts.

Karl Schamotta, chief market strategist at Corpay, spoke to BNN Bloomberg about the challenges faced by the loonie. He explained that Canada’s dependence on trade with the United States has significantly affected the dollar’s performance. ‘The linkage between the Canadian and U.S. economies has really been the downfall for the loonie this year,’ he said.

As the U.S. dollar strengthens, traders have sold off the Canadian dollar, complicating the country’s economic recovery. Schamotta believes that while the weakened loonie may be troubling short-term, it could provide an opportunity for the export sector to improve. ‘I do think a weaker loonie could help the economy recover somewhat over the long term,’ he noted.

The housing market also poses a unique challenge, according to Schamotta. He stated that ‘the share of the economy going into residential construction was exorbitant’ and that the debt funding of these investments presents vulnerabilities. The slowdown in residential construction could negatively affect employment and GDP growth.

Bank of Canada Governor Tiff Macklem recently emphasized the need for Canada to diversify its trade beyond the U.S. Schamotta discussed this, acknowledging the geographical limits of trade but stressing the need for structural changes. ‘Macklem was making a broader point about structural issues in the Canadian economy,’ he said, suggesting that overcoming interprovincial trade barriers and enhancing transportation links are critical to improving the economy.

While the call for reducing regulatory burdens and increasing domestic markets is not new, Schamotta pointed out the urgency as market investors currently lack confidence in effective reforms. ‘Businesses lobby for protections in their sectors, which lowers productivity overall,’ he argued.

On interest rates, Schamotta commented that while lower rates in Canada have played a role in the loonie’s weakness, currency movements are increasingly influenced by other factors, including U.S. equity markets. ‘Attention is shifting to other drivers, like U.S. equity markets,’ he stated.

In summary, the Canadian dollar faces numerous challenges that analysts expect will persist as the global economy evolves.