In a dramatic shift in the global currency landscape, the Canadian dollar, also known as the “loonie,” has fallen to its lowest point in two years against the US dollar following Donald Trump’s victory in the US presidential election. The loonie slumped to a low of C$1.3959 per US dollar on November 6, 2024, marking its lowest intraday value since October 2022. This sudden depreciation is part of a broader trend in which the US dollar strengthened against most global currencies, especially the G-10 currencies.
This article explores the factors driving this downturn, the potential impact on Canada’s economy, and what this means for the future of the loonie in the face of Trump’s policies.
The Immediate Impact on the Canadian Dollar
Following Trump’s decisive election victory, the US dollar surged against nearly every other currency, including the Canadian dollar. While the loonie’s drop was significant, it was less dramatic compared to other G-10 currencies. The British pound, euro, and Japanese yen all experienced declines exceeding 1%, while the loonie was down by approximately 0.8% in morning trading on November 6.
The greenback’s rise reflects investor optimism about the potential for stronger US economic growth under Trump’s leadership, especially considering his promises of tax cuts, deregulation, and a focus on economic nationalism. However, this shift also spells uncertainty for the Canadian economy, which has strong economic ties to the United States, particularly in terms of trade and investment.
Trump’s Protectionist Policies and Their Long-Term Effect on Canada
One of the most significant concerns for Canada following Trump’s victory is his protectionist policies, which could have a lasting impact on the Canadian economy and the loonie. Analysts from the Bank of Montreal (BMO) have highlighted that while stronger US growth could initially benefit Canada—due to the US being Canada’s largest trading partner—Trump’s policies, especially those targeting trade agreements and tariffs, could have a long-term negative effect.
The looming uncertainty about the future of the US-Mexico-Canada Agreement (USMCA) and potential tariff hikes could reduce foreign direct investment (FDI) in Canada. As the US moves forward with protectionist trade policies, Canada may find itself competing more fiercely for investment and trade, leading to a further weakening of the loonie.
Key Concerns for the Canadian Dollar:
- Uncertainty over Trade: The potential renegotiation or dismantling of trade deals could make Canada a less attractive destination for investment, as businesses may choose to invest in the US instead.
- Higher Tariffs: Tariffs on Canadian goods could reduce demand for exports, hurting Canada’s economy and driving down the value of the loonie.
- Weakening Productivity: The impact of reduced investment in Canada, coupled with the country’s existing productivity challenges, could suppress economic growth and keep the Canadian dollar weak.
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Bank of Canada’s Response: Rate Cuts and Economic Policy
The Bank of Canada has already implemented several rate cuts in response to slowing economic growth and rising inflation concerns. In the wake of Trump’s victory and its impact on the Canadian dollar, the Bank of Canada is likely to continue its accommodative monetary policy, potentially further reducing interest rates to support domestic growth.
In 2024, the Bank of Canada cut interest rates by 50 basis points in its most recent adjustment, bringing its key policy rate to 3.75%. The central bank is hoping that lower rates will spur consumer spending and business investment. However, with the risk of economic slowdowns and the potential for a weaker loonie, the Bank of Canada may face a challenging environment in managing inflation and growth.
Rate Cut Expectations: Traders in overnight swaps have priced in a 50% chance of another significant rate cut in December 2024. However, experts like those at BMO recommend a more measured approach, suggesting smaller 25 basis-point cuts over the next few months, especially as the global economic outlook remains uncertain.
Impact on Canada’s Corporate Sector
Trump’s proposed cuts to corporate tax rates are also expected to create a gap between the US and Canada in terms of corporate tax attractiveness. Canada’s relatively higher corporate tax rates compared to the US could lead to a shift in business investment toward the US. For Canada, which already grapples with low productivity growth, this could exacerbate long-term economic challenges.
According to Bob Dugan, Chief Economist at Canada Mortgage & Housing Corp., Canada’s lack of significant corporate investment, combined with the country’s existing productivity issues, could limit its long-term GDP growth potential. With businesses potentially looking to relocate to the US for tax advantages, Canada could see reduced job creation, economic stagnation, and a further decline in the value of the loonie.
The Road Ahead for the Loonie
The Canadian dollar’s tumble to a two-year low is a direct result of the shifting political and economic dynamics following Donald Trump’s election victory. While the US economy may benefit from Trump’s fiscal policies, Canada faces significant risks, particularly in terms of trade relations, investment, and long-term economic growth. The loonie is likely to remain under pressure as the market reacts to these changes, with heightened uncertainty about Canada’s economic trajectory.
The Bank of Canada’s response to this environment will be crucial in managing the impact on inflation, interest rates, and overall economic health. With the possibility of further rate cuts and the looming threat of protectionist policies, Canada will need to navigate this uncertain period carefully to protect its economic interests and stabilize the Canadian dollar.
As Canada watches its currency weaken, the broader implications for consumers, businesses, and the Canadian economy will become clearer in the coming months. Investors, policymakers, and ordinary Canadians alike must stay informed about these shifts as the landscape continues to evolve.