The Canadian dollar has tumbled to levels not seen since March 2020, spurred by the unexpected resignation of the country’s finance minister, which has stirred political turmoil for Prime Minister Justin Trudeau’s administration.
In recent developments widely discussed in financial circles, the loonie slid another 0.5% on Tuesday, pushing it past the 1.43 mark against the US dollar. This marks its weakest position since the onset of the Covid-19 pandemic, as Canada’s economy struggles compared to its southern neighbor and officials wrestle with threats of tariffs from President-elect Donald Trump.
Skylar Montgomery Koning, a foreign-exchange strategist at Barclays, pointed out that the political instability reflects deeper issues impacting the currency, stressing that Canada’s economic underperformance and looming tariffs continue to weigh heavily on the Canadian dollar.
Monday saw Chrystia Freeland, finance minister since 2020 and a former journalist, stepping down. She expressed her disapproval of Trudeau’s inclination toward short-term, deficit-boosting measures aimed at winning voter support. Following Trump’s win, Freeland was tasked with crafting strategies to counter US policies.
The threat of a 25% tariff on Canadian goods put forward by Trump could become more credible given the current political climate, according to Michael Puempel, a strategist from Deutsche Bank. He suggested that without more stable leadership, Trump’s aggressive trade stance might persist.
In a note to clients, Puempel speculated that Canada might face an early election by the first quarter of 2025, potentially leading to stricter fiscal policies. This scenario further strains the loonie, especially as the Bank of Canada has been reducing borrowing costs, widening the interest-rate gap with the US.
Tuesday also saw inflation dip below the Bank of Canada’s target threshold for the second time in three months, justifying the bank’s aggressive rate cuts. In an interview, Jim Caron, chief investment officer at Morgan Stanley Investment Management, noted that Canada’s economy faces mounting challenges, compounded by political uncertainty and the interest rate divide with the US.
Political risks have pushed implied volatility on the Canadian dollar to heights not seen in over a year. Consequently, Brad Bechtel, global head of FX at Jefferies, predicts the Canadian dollar could further weaken to 1.4668 against the US dollar in the coming weeks, a level last reached in March 2020.
As we close in on the end of the year, the Canadian dollar has depreciated over 7% against the US dollar, potentially marking its worst yearly performance since 2018. Hedge funds are increasingly betting against the loonie, as evidenced by the latest Commodity Futures Trading Commission data for the week ending December 10.
Describing the ongoing situation, Kit Juckes, head of currency strategy at Societe Generale, remarked that the Canadian dollar is being gradually devalued due to various pressures. He attributed these challenges to the Bank of Canada’s rate adjustments, trade uncertainties, and a government struggling with internal cohesion.
