Canadian companies have almost ceased investing in industry, with current levels of investment in industrial machinery and equipment at the lowest since 1981. Since 2015, there has been a divergence in investment trends between Canada and the US, leading to a widening gap each year.
Economists identify several factors contributing to this situation. Excessive regulation, a lack of governmental ambition to promote domestic transformation of natural resources, and Washington’s protectionist policies have been cited as reasons for the erosion of Canada’s manufacturing base.
Increasing Military Spending
There are suggestions that increasing military spending might provide some benefits to the Canadian industry. However, experts recommend a comprehensive strategy involving a competitive tax regime, a broad reduction in regulatory burdens, and clear legislation on natural resource development to address the problem effectively.
The deep-seated weakness in Canadian industrial investment compared to the US is a core structural problem for our economy. This trend, which began to diverge sharply around 2015 after the oil price shock, has consistently weighed on the Canadian dollar. With the latest August 2025 manufacturing PMI data showing a contraction at 48.5, there is little fundamental reason to expect this long-term currency weakness to reverse.
For derivative traders, this situation suggests a continued bearish stance on the Canadian dollar against the US dollar. We should be looking at strategies like buying USD/CAD call options or selling CAD futures, as the policy inertia in Ottawa offers no catalyst for a turnaround. The current exchange rate of approximately 1.41 appears vulnerable to further depreciation, especially as the US continues to benefit from industrial policies established earlier in the decade.
The underperformance extends to Canadian equities, particularly in the industrial and manufacturing sectors. We see elevated implied volatility in options on the S&P/TSX 60 index compared to US counterparts, making protective puts a prudent hedging strategy for any Canadian equity exposure. Any capital flowing into Canada is likely to remain concentrated in the resource sector, but even that is hampered by the lack of domestic processing investment.
Potential Policy Announcements
We must watch for any government announcements regarding tax competitiveness or deregulation, as these are the only potential game-changers on the horizon. However, years of inaction mean that any policy promises should be viewed as opportunities to position for a “sell the news” event. A brief relief rally in the Canadian dollar or the TSX on such news would likely offer a better entry point for re-establishing bearish positions.
