Economists say the loonie is overvalued amid a weak economy. A strong trade deal and budget may be Canada’s best bet to stabilize the dollar.
The Canadian Dollar’s Surge: Strength or Illusion?
The Canadian dollar has been riding high — perhaps too high. After gaining 5.4% against the U.S. dollar over just three months, some economists are raising red flags. According to National Bank’s Stéfane Marion and Kyle Dahms, the loonie is now trading nearly 9 cents above its fundamental value.
Short-Term Gains, Long-Term Questions
This unexpected strength is fueled by U.S. economic uncertainty under President Trump’s new tariff policies and optimism surrounding newly elected Prime Minister Mark Carney. Speculators have significantly pulled back short positions on the loonie, dropping from $12 billion to under $5 billion. But experts caution: “Markets have gotten ahead of themselves.”
Weak Economy, Strong Dollar?
Despite the loonie’s rise, Canada’s economy tells a different story. Real GDP shrank by 0.25% in February — the worst monthly dip in over two years. On a yearly basis, GDP grew only 1.5%, a dismal pace considering Canada’s population growth is over 2.8%. Consumer confidence has also plummeted to historic lows.
CUSMA Offers Temporary Relief
A major factor cushioning the blow has been Canada’s participation in the Canada-United States-Mexico Agreement (CUSMA). Thanks to carveouts in the deal, Canada avoided the brunt of new U.S. tariffs. Without CUSMA, the effective tariff rate would be 24.4%. With current compliance levels, it’s down to 15.6% and could drop further — but only if Ottawa takes decisive steps.
Ottawa’s Next Move: Trade and Budget
Marion and Dahms stress that Canada must now renegotiate CUSMA for long-term business clarity and stability. But that’s not the only priority. The Liberal government is also lagging behind on its federal budget — a delay that could dampen investor confidence and weaken the loonie.
What’s Next for the USD/CAD?
National Bank predicts the USD/CAD exchange rate will peak at 1.42 (or 70.42 U.S. cents) by Q2 before retreating to 1.35 (74.07 U.S. cents) in the latter half of 2025. That’s a path based on “fundamentals, not hope.”
Housing Supply Can’t Keep Up
On a parallel track, Canada’s housing market is hitting limits. Despite a record-breaking 260,000 units completed in 2024 — the highest since 1974 — the housing gap remains. RBC economist Robert Hogue warns that slumping pre-construction sales could hinder housing supply in the years to come.
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