Canada chooses and the loonie loses

Canadian Prime Minister Mark Carney is probably one of the few Western leaders who benefits from Donald Trump's chaotic policies. The rising tension with his southern neighbor helped him to an election victory, which is not so good for the loonie.

The Liberal Party became the largest party again last night in the Canadian elections. A few months ago, such a result would have been unthinkable. Around the turn of the year, the Liberals were miles behind in the polls. After almost ten years, Prime Minister Justin Trudeau's sell-by date had been reached by far. Many Canadians saw his policies as the cause of rising living costs, a housing crisis and migration problems. Moreover, in the eyes of voters, Trudeau offered insufficient resistance to Trump's muscle-flexing language. Instead of waiting for a hopeless election defeat, he chose to step down himself. He was succeeded by Mark Carney in mid-March.

Trump impersonation backfires
His appointment is a major reason why political sentiment in Canada changed so rapidly. Carney made a name for himself by leading the Canadian economy through the financial crisis of 2008 relatively well as chairman of the central bank. Immediately after Trump announced high import duties on Canadian goods, Carney announced similar measures on American products. This forceful action is more appealing than the approach of the conservative leader Pierre Poilievre, who imitated Trump's style with the election slogan 'Canada First'. The victory of the Liberal Party has an impact on the Canadian economy in various ways and of course also on the currency market.

Solid financial policy
The party has announced a one-percentage-point cut in the final income tax rate, well short of the 2,25 percentage points the Conservatives had promised. Carney's party has also announced it will not let the budget deficit widen much further. The combination of solid economic policy and inflation, which fell from 2,6% to 2,3% in March, paves the way for the Bank of Canada to cut its policy rate further. Over the past twelve months, the key rate has been cut in seven steps from 5 to 2,75 percent. Two more rate cuts could follow in June and July.

Oil as an additional headwind
Lower interest rates make it less attractive to hold assets in the loonie, as the Canadian dollar is also known. The oil price is also not working in the currency's favor. Due to increasing economic uncertainty, the price of a barrel of Brent oil has fallen by more than a tenth since early April to the lowest level in more than three years. That is a damper for currencies of oil-exporting countries such as Canada. Although the loonie has risen slightly against the US dollar in recent weeks, the currency is fluctuating around the lowest level since late 2020 in relation to the euro. Given that Carney does not seem to be in a hurry to close a trade deal with Trump, the future for the loonie looks somewhat bleaker than if the Conservative Party had come to power.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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