Why Is CAD So Low? Factors Affecting Its Value

The Canadian dollar, often referred to as the loonie. An exchange rate indicates the value of one currency in relation to another. This article explores the primary economic and global factors contributing to its current valuation.

Commodity Prices and the Canadian Dollar

Canada is a major global exporter of natural resources, including crude petroleum, natural gas, minerals, and agricultural products. This reliance means the Canadian dollar’s value is closely tied to global commodity prices. Changes in these prices directly influence Canada’s export revenues.

A decrease in global commodity prices, particularly for oil, leads to reduced future export earnings for Canada. This can diminish the appeal of the Canadian dollar, causing its value to weaken as demand for the currency declines. Conversely, rising commodity prices support the Canadian dollar, signaling higher potential export revenues. Crude oil exports account for a notable portion of Canada’s GDP and total exports, making oil price movements particularly impactful.

Investor sentiment and capital flows are influenced by these price movements. A sustained period of lower commodity prices can lead investors to re-evaluate their positions in Canadian assets, potentially resulting in capital outflows. This dynamic underscores why the Canadian dollar is often considered a “commodity currency,” with its performance closely mirroring global resource markets.

Interest Rate Differentials

Differences in interest rates between Canada and other major economies, particularly the United States, influence the Canadian dollar’s value. Interest rate differentials refer to the variance between the Bank of Canada’s (BoC) policy rate and those set by other central banks, such as the U.S. Federal Reserve. A higher interest rate in Canada relative to other countries can attract foreign investment.

Foreign investors are drawn to economies offering better returns, which higher interest rates provide. This increased demand for Canadian assets translates into a greater demand for the Canadian dollar, thereby strengthening its value. Conversely, if Canada’s interest rates are lower, or if the Bank of Canada is perceived as having a more accommodative monetary policy stance compared to other central banks, it can encourage capital to flow out of Canada.

As of July 2025, the Bank of Canada’s policy rate stands at 2.75%, while the U.S. Federal Reserve’s target rate ranges from 4.25% to 4.5%. This creates a significant differential, with Canada’s rates being lower. Such a divergence in monetary policy can lead to a weakening of the Canadian dollar, as investors may seek higher returns elsewhere. The BoC has been implementing rate cuts, and further reductions are anticipated, whereas the Fed is expected to cut rates at a slower pace.

Economic Growth and Trade Dynamics

The relative health of Canada’s economy and its performance in international trade also contribute to the valuation of the Canadian dollar. When Canada experiences stronger economic growth compared to its primary trading partners, especially the United States, it can boost investor confidence. Robust economic expansion attracts foreign direct and portfolio investment, as investors seek opportunities in a growing market.

Increased investment inflows translate into higher demand for the Canadian dollar, which can support or strengthen its value. Conversely, a slower pace of economic growth compared to its trading partners can deter foreign capital, leading to reduced demand for the Canadian dollar. Canada’s GDP expanded by 0.50% in the first quarter of 2025, but forecasts suggest a slower growth trajectory. There has been a notable disparity in GDP per capita growth between Canada and the United States, with the U.S. showing significantly higher growth over recent years.

Trade balances also play a role in currency valuation. A persistent trade deficit, where Canada imports more goods and services than it exports, can exert downward pressure on the currency. This occurs because more Canadian dollars are sold to purchase foreign goods and services, increasing the supply of CAD in the market. In June 2025, Canada recorded a trade deficit of C$5.9 billion. While Canada’s exports did increase, imports also rose, contributing to this deficit. A trade surplus, on the other hand, can strengthen the currency.

Global Factors Affecting CAD

Broader global economic conditions and geopolitical developments influence the Canadian dollar’s value, often by shifting investor sentiment. During heightened global uncertainty, economic instability, or geopolitical tensions, investors seek “safe-haven” currencies. These are currencies perceived as stable and reliable during turmoil, such as the U.S. dollar, Japanese yen, or Swiss franc.

In such environments, capital tends to move away from “riskier” or cyclical currencies, which can include the Canadian dollar. This flight to safety reduces demand for the CAD, leading to its depreciation. The strength of the U.S. dollar also influences the Canadian dollar. Given that the CAD is heavily traded against the USD, a strengthening U.S. dollar can make the Canadian dollar appear weaker, even if Canada’s domestic economic fundamentals remain stable.

Geopolitical events, such as the imposition of trade tariffs, can also directly impact the Canadian dollar. Threats or implementation of tariffs on Canadian goods can create uncertainty and reduce confidence in Canada’s export outlook. This can lead to a depreciation of the Canadian dollar as markets price in potential negative economic consequences, regardless of Canada’s internal economic performance.