The Canadian dollar will remain the pressure-relief valve for secular productivity challenges, trade-related uncertainty, and the prospect that the Bank of Canada will be compelled to cut rates before year-end as the Fed either remains on hold or succumbs to market pressure to tighten policy. As this plays out at the two countries’ central banks, already deep negative interest rate spreads will move deeper into negative terrain.
As all three challenges persist, if not intensify, the Canadian dollar will face unrelenting pressure, with C$1.60 to the U.S. dollar (62.5 U.S. cents) not out of reach.
As we have seen time and again, it is best to lean against any intermittent Canadian dollar rallies — the loonie is in a fundamental bear market. It says a lot that the CAD, in the face of what was a favourable “terms of trade” shock from the wartime spike in oil prices, could never muster any sustainable rally at all. Great news for domestic tourist operators and a fillip for exporters, not to mention for bargain-hunting American travelers looking for a cheap “European-style” vacation (check out Quebec City) without having to fly over the Atlantic. But bad news for most Canadians, who will see their real purchasing power erode as exporters buy their way back to recapturing lost global market share via an ever-more “competitive” exchange rate.
This isn’t just opinion-based. There is also math involved — primarily what it would take, barring fiscal action by the Canadian federal government (which to this day has never responded to the Donald Trump move in 2018 to drag the top marginal corporate income tax rate far below Canadian levels), to equilibrate domestic unit labour costs in common currency terms between the two countries. Here is the answer: The Canadian dollar faces such a dire situation, as it relates to a relentless loss of relative domestic productivity and cost competitiveness, that it is very likely to continue to weaken to C$1.50 first, and then toward C$1.60 by the end of 2027.
That is the math: the currency level that acts as the full antidote to Canada’s home-grown set of competitive challenges. A competitive mismatch has led to unit labour costs in Canada rising by 3.2% over the past year, whereas they have been roughly flat stateside. But the numbers get even worse when you consider that in U.S. dollar terms, Canadian unit labor costs (productivity adjusted wages) have ballooned by 8% over the past year, near their all-time high. When unit labor costs in common currency terms were as high as they are today, between 2011 and 2013, a Canadian dollar near parity could be blamed. Not the case now — it is all about a prolonged period of lagging productivity and a complete loss of domestic competitiveness.
The weak Canadian dollar, as a competitive crutch, is the only reason unit labor costs in USD terms have not blown out even further. Either something has to change that is fundamentally and structurally positive via fiscal reforms, or the Canadian dollar will have no other option but to descend and, in the process, make Canadian households that much poorer as the competitive depreciation is essentially little more than cutting prices to buy market share for domestic exporters.
The more Canadians are aware of the choice in front of them, already occurring in real time, the better the odds that political pressure will compel the government to take the action necessary to make Canada tax competitive again. Our analysis assumes that nothing changes in Ottawa’s approach to Canadian productivity trends and years of neglect when it comes to the nation’s productive private sector capital stock — which has stagnated now for over a decade. Our hopes for anything substantial were dashed with the latest Federal budget, which merely nibbled around the edges and paid lip service to the decay in structural economic growth.
David Rosenberg: Why the BoC’s next move will be to cut rates, sending the loonie to 65 US cents
Simply eliminating the tax rate gap with the U.S. would help out a whole lot, but this is the Liberal Party of Canada we are talking about, which, over the years, has moved further to the left and encroached on policies that in the past were the domain of the Socialist NDP.
Just consider this: in the eight years since Ottawa allowed the United States to reclaim income tax competitiveness, domestic businesses have taken C$850 billion out of Canada in terms of net direct investment outflow. Meanwhile, comparable foreign direct inflow of capital from abroad has lagged more than -30% behind at just C$560 billion. The most immediate and ongoing focus was the July 1 st USMCA renewal date. With the U.S. choosing not to renew the agreement, the result will be years of annual trade negotiations and elevated investment uncertainty.
However, another, more persistent challenge is Canada’s continuously lagging productivity performance compared to the United States. In fact, since 2008, there have been only two years in which Canada attracted more real investment from abroad than what left the country. The fact that Mark Carney never addresses this weight on the Canadian dollar and the economy, considering he is an economist after all, is for him to answer to. Seriously — it does say something that in volume terms, Canadian exports are no higher today than they were seven years ago. Did you know that you have to go all the way back to 2008 to find the last time that Canada registered a current account surplus? There has been no growth in Canadian durable goods manufacturing for nearly twenty years!
This alone speaks to this chronic loss of competitiveness. To fully close that competitiveness gap right now, the Canadian dollar would need to weaken towards C$1.50 (66.7 U.S. cents) — but if the trend in that gap continues along its path, we would be talking about an eventual weakening to C$1.60 or very nearly 60 cents.
The thing is, it would not be an unprecedented move — last happening in March 2002 during the SARS crisis, amid another period when Canadian interest rates were being driven far below U.S. comparables. The critical difference this time is the big tax and competitive gap between the two countries, which is acting as a dead-weight drag on the listless loonie.
Indeed, the productivity gap looks set to widen further. This would reflect the fact that the U.S. is in the throes of an AI-related investment surge and major pro-business tax changes, which have helped boost productivity growth to +2.8% YoY in 2026Q1, while productivity in Canada has contracted by -0.6%.
To drive home the point, note that, in real terms, Canadian investment in machinery and equipment, research and development, and software is up +3.0% in 2026Q1 compared to 2022 levels, while in the United States it is up an astounding 22.5%. That is more than a seven-fold growth spread.
This technology spending gap is a key reason why Canada’s growth potential is now so far behind, and why it is that the productivity differential is highly unlikely to be arrested any time soon. It really says something that in its most recent Monetary Policy Report in April, the adjustments made by the Bank of Canada showed a reduction in Canadian potential output growth through 2028 — while revising it up for the United States. This change alone shows that the Canadian dollar can be expected to face persistent and structural downward pressure for at least the next two years.
At present, Canada is not benefiting from an AI-capex boom; instead, it is suffering from a dearth of investment in machinery and equipment, research and development, and software, all of which would be key to boosting productivity. As well, the economy has some slack, and the Bank of Canada said growth is weak and that rate cuts are possible to support growth, but not while inflation risks are high.
One look at recent oil prices suggests that inflation risks seem to be subsiding. Now throw the uncertainty regarding USMCA into the mix. Should the U.S. withdraw from USMCA, it would lead to a staggering increase in economic uncertainty with profound effects on the economy and the Canadian dollar. Then layer on the prospect of an Alberta referendum on separation this October — not very likely to happen (polls show just 30% support), but just another in the long list of headaches confronting the currency in the months ahead.
Keep in mind that short-term rallies in the Canadian dollar can still be expected. In fact, the Commitment of Traders report for the week of June 23rd shows that non-commercial investors in the CME futures and options have built their net short positions on the loonie to a near-record 147,464 contracts — having nearly quadrupled since the end of April.
Ergo, a short-covering rally is quite possible over the near-term — but we suggest fading it. We also suggest that Canadians save some money this summer by vacationing at home.
David Rosenberg is founder of Rosenberg Research and David Watt is the firm’s director of economic research
