Is the Loonie a Value Trap?

The Canadian dollar’s deep valuation discount may unwind as investment improves, capital outflows ease and US-Canada rate differentials narrow, while the yen and yuan also strengthen and the euro remains under pressure.

• Desjardins estimates that CAD is 22% undervalued against USD on a purchasing power parity model, while its real effective exchange rate has fallen to about 102, near the bottom of its 25-year range.
• Canadian labour productivity has grown about 1.1% per year slower than US productivity over the past decade, and Desjardins estimates that productivity differences explain more than half of the current USDCAD deviation from PPP.
• Canadian non-residential capital expenditure has stayed near 15% of GDP for 10 years, although a policy shift toward resource-sector expansion and an expected strengthening in business investment suggest the cycle may be turning.
• The two-year US-Canada swap spread has narrowed to about 125 basis points from roughly 155 basis points, and Desjardins forecasts USDCAD falling gradually to 1.38 in 2027; a potential 50% US tariff on Canadian autos from January 1, 2027 remains a risk.
• Desjardins expects EUR to weaken as TTF gas prices exceed EUR100/MWh and French fiscal concerns persist, JPY to benefit from a projected 25 basis point BoJ hike in December and at least two further hikes in 2027, CNY to appreciate after China’s USD133 billion September trade surplus, and MXN to stabilize after its carry trade largely unwound.

Takeaway: The preferred currency view is a gradual CAD recovery supported by narrower rate differentials and a possible investment revival, with the productivity gap and trade negotiations limiting conviction.