Canadian companies are investing less in industry than ever before, with spending on industrial machinery and equipment hitting its lowest level since 1981. Since 2015, Canada and the US have diverged in their investment trends, creating a growing gap each year. Economists point to a few reasons for this decline. Heavy regulations, a lack of government support for transforming natural resources domestically, and protectionist policies from the US are all factors hurting Canada’s manufacturing sector.

Increasing Military Spending

There are suggestions that boosting military spending could benefit Canadian industry. However, experts argue for a broader strategy that includes a more competitive tax system, reduced regulations, and clear laws for natural resource development to truly solve these issues. The ongoing weakness in Canadian industrial investment compared to the US is a significant problem for our economy. This trend sharply diverged after the oil price drop in 2015 and has continued to negatively impact the Canadian dollar. The most recent manufacturing PMI report for August 2025 shows a contraction at 48.5, meaning there’s little reason to expect a reversal of this long-term currency weakness. For derivative traders, this indicates a bearish outlook on the Canadian dollar against the US dollar. Strategies like buying USD/CAD call options or selling CAD futures could be effective, as the lack of decisive action from Ottawa fails to provide a catalyst for change. The current exchange rate of around 1.41 seems at risk of further decline, especially as the US benefits from earlier industrial policies. This underperformance also affects Canadian stocks, particularly in industrial and manufacturing sectors. Implied volatility for options on the S&P/TSX 60 index is higher than for similar US options, making protective puts a wise choice for anyone invested in Canadian equities. Most capital entering Canada is likely to focus on the resource sector, which is also hindered by limited domestic processing investments.

Potential Policy Announcements

We should keep an eye out for any government announcements regarding tax competitiveness or deregulation, as these could be potential turning points. However, years of inaction mean that any new policy promises may just serve as a chance to “sell the news.” A brief rally in the Canadian dollar or the TSX following such news could provide a better opportunity to reinstate bearish positions. Create your live VT Markets account and start trading now.

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