The Trudeau Effect on the Canadian Dollar Fades as Reality Takes Hold

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A Fading Effect: Reality Sets In

The impact of Prime Minister Justin Trudeau’s resignation on the Canadian dollar appears to be fading, as domestic politics take a backseat to systemic headwinds. These include the ongoing effects of Trump tariffs and the expectation of more Bank of Canada rate cuts.

The Rise and Fall of the Loonie

On Monday, the Canadian dollar rose 0.79 per cent from its Friday close, briefly popping above the 70-cent-U.S. mark. However, this gain was short-lived, as the loonie fell back to 69.7 cents U.S. on Tuesday.

A Broader Picture

Currency experts and economists are weighing in on the broader issues that will continue to whipsaw the currency. Karl Schamotta, chief market strategist at Corpay Currency Research, notes that while Trudeau’s resignation may have contributed to the loonie’s rise on Monday, it is unlikely to have a lasting impact.

The Middle of the Pack

Schamotta points out that the Canadian dollar’s performance on Monday was not significantly different from other major currencies, including the Mexican peso, the Australian dollar, the pound, and the euro. This suggests that traders do not see short-term domestic political developments as changing the longer-term economic calculus.

Mixed Signals

The morning news cycle also brought mixed signals on the tariff front. A story in the Washington Post suggested that a Trump administration would roll out tariffs at a slower pace than expected. However, this was quickly rebutted by Trump himself on his Truth Social platform.

A Significant Downside Risk

Despite these mixed signals, Schamotta believes that currencies like the peso and the loonie still face significant downside risks. He notes that they have yet to depreciate to the extent that would be consistent with tariff loads exceeding 20 per cent.

Continued Volatility Ahead

CIBC Fixed Income Currency and Commodity experts agree, predicting continued volatility in USD/CAD due to headline risks. They also expect the Canadian dollar to remain exposed to the effects of Trump tariffs and a potential federal election in Canada.

More Rate Cuts on the Horizon

David Rosenberg, founder of Rosenberg Research and Associates Inc., believes that contracting data released Monday confirms that more interest rate cuts are coming from the Bank of Canada. This will lead to further depreciation of the Canadian dollar against its American counterpart as investors chase higher returns.

Conclusion

The impact of Justin Trudeau’s resignation on the Canadian dollar appears to be fading, as systemic headwinds like Trump tariffs and expected rate cuts continue to dominate the currency market. While there may be some short-term fluctuations, the loonie is likely to remain under pressure in the coming weeks.