Why Isn’t Everyone Shorting Canada?
The coming months will test whether Canada’s financial markets can continue defying economic gravity
Canada’s economy presents a striking contradiction in 2024-2025: while financial markets surge and the currency holds steady, fundamental economic indicators paint a picture of significant distress. The unemployment rate has climbed to a 9-year high of 7.1%, housing affordability has reached crisis levels, and the nation endures its second consecutive year of per-capita GDP decline. Yet the TSX has gained over 20% year-to-date, and the Canadian dollar trades with surprising resilience. This disconnect between market performance and economic reality reveals a complex interplay of monetary policy, structural factors, and forward-looking investor behavior that challenges conventional economic wisdom.
Employment crisis deepens with negative job growth
Canada’s labor market has deteriorated dramatically through 2024-2025, confirming concerns about negative employment growth. The unemployment rate reached 7.1% in August 2025, marking the highest level since May 2016 excluding pandemic years. This represents a steep climb from 5.4% in 2023 and reflects a troubling 1.7 percentage point increase over just two years.
Employment growth has indeed turned negative, with Canada shedding 66,000 jobs in August 2025 alone, followed by a loss of 41,000 jobs in July. This 107,000 two-month decline confirms that job growth is not just sluggish but actively contracting. The employment rate has fallen to 60.5%, representing the lowest level for core-aged workers since 2017-2018, while the labor force participation rate has dropped to 65.1%.
Regional variations tell a story of broad-based weakness. Ontario lost 26,000 jobs in August, while Alberta shed 14,000 positions and British Columbia cut 16,000. Manufacturing centers have been particularly hard hit, with Windsor posting 11.1% unemployment and Oshawa reaching 9.0%. Youth unemployment has climbed to 14.5%, with returning students facing a devastating 17.9% summer unemployment rate—the worst since 2009.
The Bank of Canada expects conditions to worsen further, projecting unemployment will reach 7.5% by year-end 2025 as the labor market moves into “modest excess supply.” This deterioration spans sectors, with professional services cutting 26,000 jobs, transportation eliminating 23,000 positions, and manufacturing reducing headcount by 19,000 in August alone.
Housing affordability reaches crisis proportions nationwide
Canada’s housing crisis has intensified into 2024-2025, creating severe affordability challenges across the nation despite some cooling in select markets. National mortgage payments now consume 47.9% of median household income, far above sustainable levels, with Toronto and Vancouver residents dedicating over 73% of pre-tax income to housing costs.
While national average home prices have declined 1.8% year-over-year to $672,784 in July 2025—down 19% from the March 2022 peak—affordability remains critically strained. Toronto’s benchmark price of $995,100 represents a 5.5% annual decline, while Vancouver sits at $1,165,300, down 2.7%. However, Montreal bucked the trend with prices surging 8.9% to $668,554, highlighting persistent regional disparities.
The rental market offers little relief, with national vacancy rates at just 2.2% and rent growth of 5.4% for two-bedroom units. Rental arrears have reached second-highest recorded levels, while turnover units command 23.5% rent premiums, creating mobility barriers for tenants. Montreal leads rent increases at 6.3% annually, with average rents reaching $1,639.
Canada faces a structural shortage of 3.5 million housing units by 2030 according to CMHC projections—a deficit that current construction rates cannot address. Despite record housing starts of 245,367 units in 2024, the nation needs 315,000 units annually to restore early 2000s affordability levels. Construction costs have surged 86.7% since 2017, while over 4 million mortgages (60% of outstanding) will renew over the next two years at significantly higher rates.
Per-capita recession masks overall GDP resilience
Canada presents a nuanced economic picture in 2024-2025: while avoiding technical recession, the nation experiences a prolonged per-capita recession lasting two consecutive years. GDP per capita fell 1.4% in 2024 following a 1.3% decline in 2023, with per capita GDP declining in six of the past seven quarters.
Despite this per-capita contraction, overall GDP grew approximately 1.6% in 2024, driven entirely by unprecedented population growth of 2.8%—the highest in the G7. This population growth effectively masks underlying economic weakness, with RBC Economics noting that “Canada’s economy might not be in recession but it feels like one.”
The economy finished 2024 on a stronger note, with Q4 GDP increasing 0.6% quarterly (2.4% annualized), led by household consumption growth of 1.4%—the strongest since Q2 2022. However, major Canadian banks forecast a technical recession in 2025, with TD Bank, BMO, and National Bank all predicting GDP contractions of 1.0% in both Q2 and Q3 2025.
Productivity remains a critical weakness, with Canada ranking 22nd among OECD countries—down from 6th in 1970. Labour productivity is now 30% below U.S. levels, with TD Economics describing the situation as going “From Bad to Worse” since 2019. The OECD projects Canada will rank last among 38 member countries for GDP per capita growth from 2020-2030 and 2030-2060.
Canadian dollar shows surprising resilience amid pressure
The Canadian dollar has demonstrated unexpected stability given deteriorating economic fundamentals, though it has weakened significantly against the U.S. dollar. USD/CAD currently trades at 1.387, representing a 7.7% CAD depreciation in 2024, with the currency hitting new lows below 69 cents U.S. (1.44+ CAD) in December 2024 before recovering.
Against other major currencies, the CAD trades near 1.61 versus the euro and 1.85-1.90 against the British pound. Bank of Canada data shows annual average exchange rates of 1.3698 USD/CAD in 2024, compared to 1.3497 in 2023 and 1.3013 in 2022—reflecting a progressive weakening trend over three years.
Interest rate differentials heavily favor the U.S. dollar, with a 150-175 basis point spread between the Fed’s 4.25-4.50% range and the Bank of Canada’s 2.75% rate. RBC analysis indicates that rate differences and risk premiums drove most of 2024’s CAD depreciation, though the currency’s decline has been less severe than economic fundamentals might suggest.
Major Canadian banks forecast CAD strength ahead, with expectations for USD/CAD to trend toward 1.35 by year-end 2025 and 1.33 by 2026. However, this outlook depends heavily on trade uncertainty resolution and broader economic recovery, with current volatility driven by U.S. tariff threats and political transitions.
Is Now a Good Time to Short the Canadian Dollar?
Factors that might support a short position:
The fundamental economic deterioration is severe – 7.1% unemployment heading to 7.5%, negative job growth, and a two-year per-capita recession
The 150-175 basis point interest rate differential with the U.S. continues to favor USD strength
Economic indicators suggest further weakness ahead, with major banks forecasting a technical recession in Q2-Q3 2025
The housing market correction could accelerate with 4 million mortgages renewing at higher rates
However, several factors suggest caution:
The CAD is already heavily shorted – CFTC data shows asset managers hold 97,419 short positions vs 32,700 long, suggesting crowded positioning. “positioning saturation limits additional shorts.” When a trade becomes too crowded, even correct fundamental analysis can lead to losses if the market reverses.
Structural supports remain – Canada maintains the G7’s strongest fiscal position, commodity prices provide a floor, and USMCA protections limit trade disruption risks. the USMCA framework provides crucial protection, with 90%+ of Canadian exports qualifying for tariff exemptions despite political rhetoric about trade conflicts.
Conclusion
While unemployment climbs toward 7.5%, housing affordability reaches crisis levels, and per capita living standards decline for the second consecutive year, the currency maintains surprising resilience.
This disconnect reflects the power of monetary policy, structural support mechanisms, and forward-looking market behavior. However, expert warnings suggest this divergence may not persist indefinitely—particularly if labor market weakness deepens, trade conflicts intensify, or the housing market contraction spreads to broader economic sectors. The coming months will test whether Canada’s financial markets can continue defying economic gravity or if fundamentals will eventually reassert their influence.