There’s been much speculation in recent weeks about the decline of the Canadian dollar against the U.S. dollar. In the last 12 months, the Canadian dollar has fallen by about 3.5 to 4 per cent to $0.71 as compared to the U.S. dollar. Bloomberg news recently noted that the Canadian dollar overtook the Japanese yen as the most heavily shorted currency by speculators among major world currencies, indicating a serious lack of confidence in Canada’s economy. This happened prior to President Donald Trump’s announcement of the possibility of new tariffs on Canada later in August, although the position was undoubtedly based somewhat on the possibility of more problems emerging in the Canada-U.S. trade relationship.
Other serious problems in the Canadian economy that are unrelated to whatever Trump does are also responsible for the dollar’s poor performance. Canada’s consistent decline in economic productivity, which has been taking place for years because of bad federal Liberal economic policy, and that of some provinces, is a major factor. Soft GDP growth for a number of years also drags down our currency. Higher bond yields in the U.S. compared to Canada attract more investment into the U.S. Strong productivity growth south of the border has also contributed. The Bank of Canada is also expected to leave interest rates unchanged for the near future or even reduce them because of our economic weakness, which compares to other countries that have been increasing their interest rates. Considerably higher taxes in Canada relative to the U.S. don’t help either.
So where do things go from here? Some recent forecasts by Canadian economist David Rosenberg, now living in the U.S., tell the tale. Rosenberg is consistent ranked in the top three among Wall Street economists. His take on the future of the Canadian dollar is decidedly bearish, with the possibility of a dollar close to 60 cents U.S. by the end of 2027 not ruled out. He cites the three main reasons as the productivity problems mentioned above, trade-related uncertainty and the likelihood that the Bank of Canada will need to cut interest rates before the end of this year while the U.S. Federal Reserve will either not change rates or may even increase them. Rosenberg also notes how the recent spike in oil prices because of the Iran war only caused a weak and short-lived rally in the Canadian dollar – much less of a boost than such an event would have created in the past.
Rosenberg also notes the dire impact of the U.S. having significantly reduced their corporate tax rate in 2018, and Canada’s failure to match that reduction. He attributes an outflow of investment of $850 billion by domestic businesses and $560 billion by foreign investors from Canada to the gap in corporate tax rates between the two countries. And for those Canadians who seem to believe it’s no big deal if we don’t renew our current trade agreement with the U.S., he warns about the even more serious negative implications for Canada should that happen. That should get the Carney government to the negotiating table fast, yet that government continues to put partisan advantage due to Trump-hatred among some Canadians ahead of policy that would actually help the country.
Most Canadians likely don’t pay too much attention to the value of the Canadian dollar unless they are travelling. But a lower dollar has big implications for all Canadians far beyond their travel destinations. Considering how much we import from the U.S., our lower dollar gives another boost to inflation, eroding purchasing power and worsening affordability. Exporting industries will find a lower dollar means they are more competitive, but this will probably forestall their need to invest in new equipment or technology to improve their productivity, harming Canada in the longer run. Canadian businesses that import from the U.S. or other countries with more solid currencies will be competitively damaged. Simply put, a lower dollar makes Canadians poorer.
The relatively low value of our dollar and the expectation of further declines is a clear result of our sluggish economy, dragged down largely by government policy choices. Canadian politicians love to point at things like the Iran war and other global upsets as the cause of our problems. But other countries have faced those as well and continue to turn in better performances. Once again, the hard facts show how our failings in Canada are largely self-inflicted.
Yet most Canadian politicians continue their dishonest claims that Canada is “Canada Strong,” open for business, attractive to investors and a leader in selected statistics for the G7. All by itself, what is happening to the Canadian dollar puts the lie to these claims. It appears that having a so-called “brilliant economist” running the country isn’t the panacea many Canadians thought it would be.
She has published numerous articles in journals, magazines & other media on issues such as free trade, finance, entrepreneurship & women business owners. Ms. Swift is a past President of the Empire Club of Canada, a former Director of the CD Howe Institute, the Canadian Youth Business Foundation, SOS Children’s Villages, past President of the International Small Business Congress and current Director of the Fraser Institute. She was cited in 2003 & 2012 as one of the most powerful women in Canada by the Women’s Executive Network & is a recipient of the Queen’s Silver & Gold Jubilee medals.
