A global perspective reveals the Canadian dollar to be among the weakest performers of G10 currencies against the U.S. dollar.selensergen/iStockPhoto / Getty Images
Seasoned investors have long been aware of the power of narratives and the pitfalls of expecting performance to match them. This phenomenon appears in many corners of financial markets, but one such example of late has been in the price action of the Canadian dollar CAD-USD.
After touching a near 10-year low back in January, at $1.45 against the U.S. dollar, or 69 US cents, the loonie has since rallied 6 per cent to its best level since October. We caution investors against extrapolating the rebound to some new-found fundamental strength in the Canadian economy, however.
Instead, the loonie’s flight has been nothing short of a mirage created by broad-based U.S. dollar weakness.
A global perspective reveals the Canadian dollar to be among the weakest performers of G10 currencies against the greenback – getting a modest lift for the year-to-date (4.5 per cent). Indeed, only the Australian dollar (up 4.1 per cent) has advanced by less. Meanwhile, the likes of the Swedish krona (up 14.9 per cent), Norwegian krone (up 12.1 per cent), Swiss franc (up 9.7 per cent) and euro (up 9.6 per cent) have seen the largest boosts.
On a trade-weighted basis, the Bank of Canada’s CEER index – which measures exchange rates for the loonie against the currencies of Canada’s major trading partners – tells a similar story. Excluding the U.S. dollar, the nominal CEER has slumped by 2 per cent so far in 2025.
So where do we go from here?
There is nothing fundamental to the recent gains in the Canadian dollar. We expect continued sanctioning of a weaker currency by the Bank of Canada as an antidote for an economy that lacks productivity and has been mired in a per-capita GDP recession.
Indeed, “fair value” calculations based on yield differentials, and where oil prices are trading, point to a loonie that is some 2 per cent below current levels (71 US cents or $1.40). Employment growth has slowed while the unemployment rate pushes 7 per cent (5.8 per cent on an apples-to-apples comparison with the United States, which has a jobless rate that is 1.6 percentage points lower, at 4.2 per cent).
Moreover, the Canadian-dollar model in our Strategizer publication, which assesses a broad array of indicators that include sentiment, technicals, valuations and earnings fundamentals, has seen a significant reduction in its score. This model correctly flagged the possibility for a rally at the beginning of the year but is now saying that the easy gains have been underlined by an increasingly more constructive U.S. dollar score, which is at a seven-month high.
With those easy gains behinds us, the currency may continue to drift upward, but we caution against buying into any narrative of secular loonie strength at this time.
Marius Jongstra is vice-president of market strategy at Rosenberg Research
