As domestic politics take a backseat, the Canadian dollar appears to be recovering from its recent fluctuations, influenced by systemic headwinds such as Trump tariffs and anticipated Bank of Canada interest rate cuts.
A Mixed Bag for the Loonie
On Monday, the Canadian dollar saw a 0.79% increase from its Friday close, briefly surpassing the 70-cent-U.S. mark, which it had fallen below on December 16 following Chrystia Freeland’s announcement as finance minister.
A Note of Caution
Karl Schamotta, chief market strategist at Corpay Currency Research, warned against attributing the loonie’s rise solely to Prime Minister Justin Trudeau’s decision to step down. According to Schamotta, traders do not see short-term domestic political developments changing the longer-term economic calculus that has kept the exchange rate under pressure.
The Impact of Tariffs
Mixed with the prime minister’s announcement was a Washington Post story quoting advisors close to Trump who said that any United States tariffs would be implemented on a targeted basis rather than across the board, and gradually. This news came out around 7 a.m. EST, but Trump later rebutted the piece on his Truth Social platform.
Expert Opinions
David Rosenberg, founder of Rosenberg Research and Associates Inc., pointed to contracting data released Monday as confirmation that more interest rate cuts are coming to counteract a slowing economy. The S&P Global Composite Purchasing Managers’ Index for December fell below 50, indicating a slump in sentiment among managers at manufacturing, construction, and services firms.
A Warning from the Experts
Schamotta believes such currencies still face ‘significant downside risks’ and have yet to depreciate ‘to the extent that would be consistent with tariff loads exceeding 20 per cent.’ CIBC Fixed Income Currency and Commodity experts also noted in a fresh note on Tuesday that a Trump administration will roll out tariffs at the slower pace described in the Washington Post article, leaving the Canadian dollar exposed.
Interest Rate Cuts Ahead
Rosenberg expects continued volatility in USD/CAD off headline risks. He sees the tariff premium in USD/CAD building through Q1 as Trump ramps up tariff rhetoric, at the same time as Canada prepares for a federal election, which is likely to see a flip in the governing party.
The Bank of Canada’s Next Move
Rosenberg also noted that contracting data released Monday confirms his expectation that more interest rate cuts are coming from the Bank of Canada to counteract a slowing economy. This will result in the Canadian dollar falling further against its American counterpart as investors chase higher returns from the greenback.
Conclusion
The impact of Justin Trudeau’s resignation on the Canadian dollar appears to be fading away, replaced by systemic headwinds such as Trump tariffs and anticipated Bank of Canada interest rate cuts. As experts continue to weigh in on the economic implications, one thing is clear: the Canadian dollar will face significant challenges in the coming months.
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