Every quarter, the Bank of Canada provides clues about its preoccupations by including special “boxes” in the monetary policy report. Think of them as Easter eggs. 

The latest MPR contained two such boxes. One of them could have been its own report. The central bank used seven pages to describe a hypothetical trade-war scenario and a few variations of how that scenario could ripple through the economy. Two conclusions: tariffs would cause economic growth to slow and inflation to accelerate, but attempting to make precise forecasts at this time is a fool’s errand. 

Understandably, the Bank of Canada’s expanded thoughts about tariffs got most of the attention. But there was another Easter egg hiding at the very end of the MPR. This one was about the dollar, and it probably contained more useful information. 

If not for all the political distractions, the exchange rate would be a bigger story. The loonie was clinging to a value of about 69 U.S. cents after the Bank of Canada cut interest rates this week, the weakest since the early days of the COVID-19 pandemic. A year ago, the Canadian dollar was trading around 75 U.S. cents. For those who treat the currency markets like figure skating judges, Canada has tumbled well out of medal contention when it comes to economic performance. 

But like figure skating judges, currency markets are imperfect arbiters of objective value. The world is a complicated place, full of investors, companies and individuals buying currencies to speculate, hedge and buy goods and services. The dominance of the U.S. dollar as the primary means of global exchange and the safest store of short-term value skews things, as does China’s insistence on managing the yuan. 

Canada doesn’t suck as much as the exchange rate suggests. Governments held the equivalent of US$324 billion of Canadian dollars in their official reserves in the third quarter of 2024, a 9.5 per cent increase from the end of 2023, according to the International Monetary Fund. Total foreign reserves increased 3.1 per cent over that period. Countries are steadily diversifying their basket of reserve currencies, and the Canadian dollar is in the mix of plausible alternatives.  

Canada’s status as a secondary haven is one of the reasons the country isn’t close to suffering a currency crisis. The last time officials showed real concern over the dollar’s weakness was in early 2002, when the loonie was worth about 62 U.S. cents. David Dodge, the Bank of Canada governor at the time, and Paul Martin, then the finance minister, were forced to make a point of expressing their dismay, a passive-aggressive way of signalling they were prepared to intervene to boost the currency’s value.  

The current Bank of Canada governor isn’t thinking about intervention. Still, the exchange rate is climbing the charts of variables that weigh on Tiff Macklem’s mind as he considers where to set interest rates. The summary of the deliberations that led to the central bank’s decision to drop the benchmark interest rate by half of percentage point in December show that policymakers paused to consider the implications for the dollar before going ahead with the outsized cut. 

And then on Wednesday, when the Bank of Canada cut interest rates by a quarter point, the central bank observed that the Canadian dollar “has depreciated materially” against the U.S. dollar, signalling that the exchange rate again gave policymakers pause.  

“Has the movement in the Canada-U.S. exchange rate constrained our monetary policy decisions to this point? The answer is no,” Macklem said at a press conference. 

However, the governor acknowledged it will start to ripple through the economy. Imports will become more expensive, stoking inflation and impeding business investment. Exports will be cheaper, which could be good for growth. “The bigger the movements in the Canadian dollar, the more we’re going to have to take those into account as we set policy going forward,” he said.  

The challenge for policymakers will be determining how much of the currency’s depreciation is based on fundamentals, and how much of it is based on vibes, voodoo and other things over which they have little control. 

A few hours after the Bank of Canada cut interest rates for the sixth consecutive time, the Federal Reserve opted to leave its policy rate unchanged, widening the gap between U.S. and Canadian rates to roughly 1.25 percentage points. The widening gap counters the view that the Bank of Canada must always follow the Fed. However, there are limits to how much that gap can widen because the two economies are so interconnected. Every time the Bank of Canada cuts and the Fed doesn’t, that limit draws closer. 

All things equal, the differential makes American fixed-rate assets more attractive than Canadian ones, suggesting monetary policy is a factor in the dollar’s weakness. For now, the Bank of Canada appears to have decided that policy is playing only a minor role in the decisions to buy and sell the dollar. The Easter egg it stashed at the end of the MPR shows that “most” of the depreciation since October is the result of traders demanding higher risk premiums to hold Canadian assets because of Trump’s tariff threats—expectations for rate divergence have changed relatively little, implying the gap with the Fed has had only a “modest” impact on the exchange rate, according to the Bank of Canada’s analysis.

The implication is that the exchange rate isn’t yet a barrier to additional rate cuts, if the Bank of Canada decides that’s what’s required over the months ahead. But it also shows the extent to which Canada has surrendered its prospects to the whims of whoever is in the White House. That risk premium would be lower if we weren’t at Donald Trump’s mercy. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.