Toronto, Jan. 7, 2025 – Canadian Prime Minister Justin Trudeau resigned as Liberal Party leader on Monday, setting the country up for a new prime minister by late March and potentially resetting its trade relationship with the US during the second Trump administration.
“A new government could be good for [the Canadian dollar], and Trudeau is speeding up the process,” wrote Kyle Chapman, FX markets analyst at Ballinger Group, in an email on Monday.
Chapman argued the election of a conservative prime minister, like Pierre Poilievre, would be more aligned with President-elect Donald Trump’s “hallmarks,” such as “a dislike of deficit spending and a desire for deregulation and tax cuts.
” Poilievre has also expressed a strong preference for a hawkish monetary policy and a strong Canadian dollar.
Pressure had mounted in recent weeks as Canada’s party leaders debated how to handle Trump’s tariff threats.
Last month, Deputy Prime Minister Chrystia Freeland resigned, citing internal struggles between herself and Trudeau over Canada’s best path forward. She added that the country can “ill afford” to take on Trump’s tariffs, should they come to fruition.
“A conservative, Trump-aligned leader in Canada could also mean that the US administration becomes more amenable to going easy on trade tariffs,” Chapman said.
The Canadian dollar, often referred to as the loonie in financial markets, had traded at a four-year low against the dollar following Trump’s election win.
Rumors of Trudeau’s departure first began to circulate late Sunday, sending the Canadian dollar higher against the US dollar.
But the currency’s moves on Monday were more closely tied to Trump’s latest tariff threat than political turmoil, according to analysts.
“I think an important part is to [consider] whether this is an idiosyncratic move in CAD or whether or not this is related to the broad US dollar. I would put this in the latter camp,” Mark McCormick, global head of foreign exchange and emerging market strategy at TD Securities, told Yahoo Finance.
Earlier on Monday, the Washington Post reported that Trump’s team is exploring more limited tariffs than anticipated. Trump had previously pledged to impose blanket tariffs of at least 10% on all trading partners, including a 60% tariff on Chinese imports and 25% levies on Canadian goods.
Immediately following the report, the dollar dropped sharply as markets recalculated the potential inflationary impact of Trump’s plans.
The index later pared some of its losses after Trump called the Washington Post report “wrong” in a social media post.
“You can see how sensitive the market was to the tariff news this morning,” McCormick said, noting the US dollar “is just stretched right now.”
“The dollar is looking for excuses to pull back, maybe lighten up the trade a little bit,” he continued. “But there’s nothing here that I think is idiosyncratic to the Canadian dollar or Canada.”
Trudeau will continue to serve as prime minister during the first few months of Trump’s presidency and will manage tariff talks during that time. Canada and the United States are each other’s largest trading partners.
Goldman Sachs previously said in a note published on Jan. 3 that the risk of tariffs “look underpriced in USD/CAD.”
“President-elect Trump’s latest tariff proposals present significant downside risk to Canadian growth,” wrote Kamakshya Trivedi, an economist on Goldman’s global macro and emerging markets research team.
“Our latest estimates of the tariff premium in USD/CAD suggest that markets may only be pricing about a 5% chance of a 25% tariff. While we suspect that the proposed tariff will not ultimately be implemented, we argue that markets are underestimating the macroeconomic risks.” (Yahoo Finance)
