The Canadian dollar’s underperformance has deepened over the last two years. Soft commodity prices, subdued investment, and rising household borrowing costs—the heaviest in the G7—are weighing on economic growth, forcing the central bank to ease policy more aggressively than the Federal Reserve. Donald Trump’s imminent return to the White House has reignited trade uncertainties, putting the exchange rate under additional pressure. 

These challenges will persist in 2025. Mortgage resets will raise aggregate household borrowing costs, turbulence in the country’s relationship with the US will crimp business investment, and the Bank of Canada’s rate cuts will continue. Currency markets—always prone to overshooting—could drive the loonie lower, particularly ahead of January’s presidential inauguration. 

Canadian household debt burdens are the heaviest in the G7
Household debt service ratios
Q1 1999 – Q1 2024

But prospects could brighten as the year progresses. The Bank of Canada’s easing efforts might translate into a sustained rebound in consumer spending and housing activity, while spillovers from robust US growth bolster other areas of the economy. A moderation in the ‘Trump trade’ could give the loonie some breathing room, and a Conservative victory in the autumn election may put trade relations on a better footing. By year end, the exchange rate could regain some lost ground as domestic and international conditions stabilise.