Canadian Dollar: When Politics Weigh

Above: File image of Chrystia Freeland. Source and licensing: Center for American Progress.

Politics might be a new negative facing the Canadian Dollar at the turn of the year.

Foreign exchange analysts say the resignation of a senior member of Canada's government has injected a dose of political uncertainty into financial markets, and as we have seen in the UK and Eurozone over recent years, political uncertainty can weigh on currencies.

Canada has long been seen as a relatively stable political bet, however, the resignation of Chrystia Freeland, Canada's deputy prime minister and minister of finance, "unleashed a political earthquake in Ottawa".

She quit with a scathing departure note, questioning whether Prime Minister Justin Trudeau was up to the job of confronting aggressive 'America-first' economic nationalism.

"There are still a lot of depreciative drivers right now, with political uncertainty being added to the mix," says Kyle Chapman, an analyst at Ballinger Group.

Freeland was due to provide an annual fiscal government update in parliament just hours after she exited. Following the developments, the Canadian Dollar slumped, with USD/CAD shooting to 1.4271.

"Canada's Chrystia Freeland shocked the world with a scathing post on X announcing her resignation from Trudeau's government after a falling out over the budget that was to be released later that morning. The media reported the dispute was over Trump tariffs, but the budget released later in the day crossed the red line on spending that she had promised would not be crossed, and by a wide margin," says W. Brad Bechtel, Global Head of FX, Jefferies.

Dominic LeBlanc now serves as Finance Minister and attended Trump's Mar-a-lago home with Trudeau during a recent visit.

Trudeau is now facing calls from members of his own Liberal Party to quit.

Bechtel says the issues on the political side are more turbulent than many had expected.

"At the margin, this development hurts Canadian assets and the CAD," says a note from BCA Research.

Investment bank GBP/CAD consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. Featuring the median, mean, high and low points forecasted by over 30 investment banks. Please request a copy here.

"Canada is at risk of finding itself on the slippery slope that so many others are finding themselves, including the US. The covid spending binge has been hard to dial back and governments assume they can just get away with it. The US can, because we are the reserve currency, but even that might get tested this next year if we see Trump try to spend," he explains.

In Canada, the need for fiscal discipline is becoming apparent, which is why the market is taking an interest in the politics.

"The UK, Canada, India, Brazil, so many others, are finding themselves in a situation where inflation is done moderating, but growth is low, and they are keen to keep spending to support growth which puts pressure on the currency and therefore inflation and the central bank. This doom loop can get nasty as Brazil is finding out, but can be solved with some hard fiscal decisions. Markets have a way of enforcing this discipline like we saw with Liz Truss and like we are now seeing with Lula and probably now Trudeau," says Bechtel.

How much further damage might the episode do to the Canadian Dollar? BCA Research thinks the worst has passed.

"At the margin, this development hurts Canadian assets, and the CAD, but the Trudeau government was already at the end of its mandate, and an election was in the cards by October 2025," says the independent research company in a client note.

"Canada’s challenging macro outlook is already priced in, meaning investors should maintain a neutral weight to Canadian government bonds within a global fixed-income portfolio," it adds.