Canadian Dollar Faces Headwinds Amid Political Turmoil

The Canadian Dollar (CAD) has halted its recent bullish recovery, halting on the charts and cycling familiar levels against the Greenback. The Loonie has recovered some ground after tumbling to multi-year highs at the tail-end of 2024, but bullish momentum remains elusive. Canada’s Ivey Purchasing Managers Index (PMI) figures disappointed CAD traders, as business activity survey results continue to miss the mark. Canadian exports and imports both rose last November, but the data was too long-dated and low-impact to meaningfully direct CAD moves.

Canada’s headline Ivey PMI for December fell to a 12-month low of 44.3 compared to November’s 49.7 as business activity expectations contract sharply. The seasonally-adjusted Ivey PMI rose to 54.7 from 52.3, but still missed the forecast print of 55.4, a decidedly lofty expectation. Prime minister, Justin Trudeau announced on Monday that he would step down as prime minister and leader of the Liberal party , to create a growing domestic political turmoil and there exists also a seriuos threat of new tariffs from the incoming Trump administration, constituting two key factors that could keep the Canadian dollar caged in 2025.

US business activity survey results took center stage on Tuesday, with the ISM Services PMI for December surged to 54.1 versus the expected 53.3 and previous 52.1. Rising business activity and production costs in the US are reigniting fears of a lack of Federal Reserve (Fed) rate cuts in 2025, cooling risk appetite. Friday’s upcoming Nonfarm Payrolls (NFP) print will take on renewed interest as investors look for reasons to continue hoping for fresh rate cuts.

This year, the currency dropped over 8% versus the US dollar, and this week, it briefly plunged to a four-year low of C$1.44. In contrast to earlier periods of decline, neither a global financial crisis nor a drop in the price of oil were to blame. Rather, interest rates were mostly responsible for last year’s decline. Wherever they can get a better interest rate on their deposits, currency investors go. The Bank of Canada’s interest rate is currently more than 110 basis points below the middle of the Federal Reserve’s target range following five straight rate cuts. Since the beginning of 2024, the difference has widened significantly.

They have excellent reason to be pessimistic about the loonie. The fortunes of Canada have been different from those of its neighbor since the Covid-19 pandemic. IMF statistics shows that between 2019 and 2023, America’s real GDP rose by over 10%, while Canada’s climbed by 6%. In contrast to the US, which is predicted to increase by 2.8% in 2024, Canada’s economy is only forecasted to grow by 1.2%.

The price of Canada’s largest export, energy, is mediocre. At $75 per barrel, Brent crude oil is currently nearly one-third less than it was in 2022, when prices surged in response to Russia’s full-scale invasion of Ukraine. Issues that investors may have previously dismissed become difficult to overlook in the absence of the safety net of booming oil revenue. High household debt, a declining manufacturing base, a persistent productivity issue, declining domestic demand, and an increase in unemployment are a few of these.

As previously said by Donald Trump, a weak currency can be advantageous. A declining loonie should, in theory, maintain the competitiveness of Canadian exports. But to manage this danger, a stable government and strong leadership would be required, especially since Trump has threatened to impose a 25% tariff on Canadian goods. Hours after Trudeau resigned, Trump reaffirmed his call for Canada to become the 51st state in the US.


The fact that investors were already quite pessimistic is why there was no surprise. Short bets on the Canadian dollar likely peaked in August, when they hit a record $14 billion. The currency will still require a vast runway in order to take off again, just like the common loon, after which it gets its name.