The announcement of resignation from Canada’s Prime Minister Justin Trudeau on Monday opens up some important questions for where the CAD (Canadian dollar) will be going over the next couple of months. The immediate reaction was for it to get stronger, particularly against its southern counterpart. But is that the start of a new trend, or just a blip as market forces reassert themselves over geopolitics?
Trudeau’s resignation, of course, didn’t come as a major surprise, as pressure had been building on his government for months. He’d already lost his Finance Minister, Chrystia Freeland, over a budget dispute in mid-December. Before that, the junior partner of the administration, the NDP, ended its governance agreement with Trudeau’s Liberals back in early September. Since then, rumors of an imminent resignation had been gaining traction.
What’s Next
Trudeau isn’t stepping down immediately, therefore it’s more of a resignation announcement than a resignation. He will stay on at the top job in Canada until his party selects a new leader, which is expected by March 24 when Parliament will come back prorogation. That’s essentially a suspension of the legislature while the Liberal Party sorts out its leadership issue. But, without a majority in Parliament, its future leader will have to rely on other parties to form a government. But the traditional allies, the NDP, saying they will vote against any new Liberal leader.
The chance of an anticipated general election has grown considerably, and that’s where market-moving policy changes could happen. The Conservative Party lead by Pierre Poilievre is far in away the lead in voter preference, and likely to take the popular as well as electoral vote this time around. The Conservatives have been trying to get a no-confidence vote to trigger a general election for months, and might finally get their wish at the end of March.
What’s Moving the Market
The Canadian dollar has been weakening since September, following the spread in yields with the US dollar. The lack of economic growth in Canada has kept the BOC on a steeper easing path than the Fed. On top of that, incoming US President Donald Trump has threatened tariffs on his northern neighbor, further weakening its currency.
The political uncertainty in Ottawa could both aid and sharpen the crisis its currency faces. A potential return of the Conservatives to power might find more common ground with Trump and avoid or at least mitigate the impact of tariffs. Before that, however, there is a chance of a new Liberal PM, who would largely be expected to continue most of the current government policies.
It’s not a clear path
However, one of the potential candidates is Chrysta Freeland, the former Finance Minister who quit over what she called excessive spending. A Freeland premiership might leave the market thinking there will be less spending, less inflation but also less growth in the short term. All of that could leave the dollar even weaker, as the former head of finances doesn’t have experience dealing with Trump.
In the meantime, however, fiscal policy in Canada is likely to remain in limbo for virtually the entirety of the first quarter. That will leave the BOC to its easing track, which might mean the CAD (Canadian dollar) will turn back to its weakening streak as long as the Fed seems hawkish. But potential political negotiations and the chance of a general election being pulled forward or not could still shake up the currency.