The Trudeau Effect Fades Away as Reality Sets In
The impact of Justin Trudeau’s resignation on the Canadian dollar appears to be fading, as domestic politics take a backseat to systemic headwinds. The recent rise in the loonie’s value can be attributed to factors beyond Trudeau’s decision to step down.
Rise in Loonie’s Value Temporarily Masks Reality
On Monday, the Canadian dollar rose 0.79 per cent from its Friday close, briefly breaching the 70-cent-U.S. mark that it had dropped on December 16, the day Chrystia Freeland announced her resignation as finance minister.
Expert Analysis Reveals Broader Issues at Play
Karl Schamotta, chief market strategist at Corpay Currency Research, noted that the loonie’s performance on Monday was not solely due to Trudeau’s decision. "It may be tempting to ascribe this (the loonie’s rise on Monday) to Prime Minister Justin Trudeau’s decision to step down yesterday," Schamotta said in a note. However, he emphasized that the loonie’s gains were part of a broader trend among major currencies.
Mixed Signals from Washington
The Canadian dollar was not alone in its movements. The peso and the loonie moved in a somewhat narrow range on news related to Trump tariffs. According to Schamotta, 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."
Tariffs and Interest Rate Cuts: A Perfect Storm for the Loonie
In a fresh note on Tuesday, CIBC Fixed Income Currency and Commodity experts stated that a Trump administration will roll out tariffs at a slower pace described in the Washington Post article. This still leaves the Canadian dollar exposed to volatility.
"We expect continued volatility in USD/CAD off headline risks," the note said. "We see the tariff premium in USD/CAD building through Q1 as Trump ramps up tariff rhetoric, at the same time as Canada ramps up for a federal election, which is likely to see a flip in the governing party."
Bank of Canada’s Next Move: Interest Rate Cuts
David Rosenberg, founder of Rosenberg Research and Associates Inc., confirmed that contracting data released Monday indicated 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 the sentiment among managers at manufacturing, construction, and services firms is slumping. Rosenberg emphasized that this serves as a reminder that the Bank of Canada has more work to do even as the Federal Reserve moves to the sidelines (at least for now).
More Rate Cuts Ahead
Rosenberg predicts that more rate cuts from the Bank of Canada will result in the Canadian dollar falling further against its American counterpart. Investors will continue to chase higher returns from the greenback.
The impact of Justin Trudeau’s resignation on the Canadian dollar is fading as reality sets in. The loonie’s recent rise was a temporary phenomenon, and broader issues such as tariffs and interest rate cuts are taking center stage.
