(Bloomberg) — The Canadian dollar has fallen to its lowest level since March 2020, as Prime Minister Justin Trudeau’s government plunges into crisis following the shock resignation of his finance minister.
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The currency extended its recent losses, falling another 0.5% on Tuesday to past 1.43 per US dollar, its weakest level since the Covid-19 pandemic first shut down cities. The loonie has declined as the economy of the U.S.’s northern neighbor lags and officials struggle to come up with a plan to respond to tariff threats from newly elected President Donald Trump.
The latest political turmoil “is symptomatic of the larger problems facing the currency as its economy underperforms that of the US – and now faces the threat of tariffs,” said Skylar Montgomery Koning, currency strategist at Barclays. “We see continued pressure on the fool.”
On Monday, Chrystia Freeland, a former journalist who has been finance minister since 2020, resigned from her position with a letter expressing her opposition to the prime minister’s push for short-term spending on voter-friendly measures such as tax breaks that boost the economy. budget deficit. After Trump’s victory in the US, Freeland was picked to lead a cabinet group tasked with developing a strategy to respond to US policies.
Trump has threatened 25% tariffs on Canada, which Deutsche Bank strategist Michael Puempel believes is likely to be implemented following recent political unrest.
“Simply put, unless there is greater stability in Canada’s political leadership, we believe Trump is likely to maintain his maximalist approach to trade with one of the U.S.’s largest trading partners,” he wrote in a letter to clients on Tuesday. He said his base case is that Canada will hold snap elections in the first quarter of 2025 and ultimately adopt tighter fiscal policies.
Foolishly, this only means more pressure as the Bank of Canada cuts borrowing costs – leading markets to anticipate a wider interest rate differential with the US. Earlier on Tuesday, inflation fell below the central bank’s target for the second time in three months, providing justification for policymakers’ aggressive cuts.
“The Canadian economy is skating on thin ice right now and is made worse by the political turmoil there,” Jim Caron, chief investment officer of cross-asset solutions at Morgan Stanley Investment Management, said in an interview. The political situation is weighing on the currency, on top of the interest rate differential between Canada and the U.S., he added.
Implied volatility on the Canadian dollar spiked to its highest in more than a year on Tuesday, amid rising political risks.
With “holiday liquidity” driving the currency, the currency could even weaken to 1.4668 per U.S. dollar in the coming weeks, said Brad Bechtel, global head of FX at Jefferies. That level was last seen on March 19, 2020.
The currency is down more than 7% against the US dollar so far this year, and is on track for its worst year since 2018. Hedge funds stepped up their bets against the madman in the week ending December 10, according to the latest Commodity Futures Trading Commission data.
The Canadian dollar “is undergoing a devaluation of a thousand cuts,” Kit Juckes, head of currency strategy at Societe Generale, wrote in a note on Tuesday. “The Bank of Canada has removed interest rate support, uncertainty over rates weighs on us and the government is struggling to stay united.”
–With help from Carter Johnson and George Lei.
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