Finance minister's resignation and economic struggles push loonie down 7 percent this year
The Canadian dollar fell to its lowest level since March 2020, dropping 0.5 percent on Tuesday to trade past 1.43 per US dollar.
The loonie's decline follows the resignation of Finance Minister Chrystia Freeland and ongoing economic concerns, according to BNN Bloomberg.
The currency has now dropped more than 7 percent against the US dollar this year, putting it on track for its worst performance since 2018.
Hedge funds increased their short positions on the loonie during the week ending December 10, as per Commodity Futures Trading Commission data.
Freeland stepped down on Monday, citing opposition to Prime Minister Justin Trudeau’s focus on short-term spending that would expand the budget deficit.
In her resignation letter, she expressed her disapproval of voter-driven measures like tax breaks.
Freeland had also been tasked with leading a cabinet group to strategize Canada’s response to Donald Trump’s policies following his election victory in the US.
Trump’s 25 percent tariff threat on Canada looms large. Deutsche Bank strategist Michael Puempel said these tariffs are now more likely to materialize given Canada’s political instability.
“Simply put, unless there is more stability in Canadian political leadership, we believe Trump is likely to maintain his maximalist approach to trade with one of the US’s largest trading partners,” Puempel wrote on Tuesday.
He predicted Canada may face an early election in the first quarter of 2025, potentially resulting in tighter fiscal policy.
The political situation adds to economic pressures on the Canadian dollar.
“[The latest political turmoil] is symptomatic of the greater troubles facing the currency with the economy underperforming the US — and now facing the threat of tariffs,” said Skylar Montgomery Koning, foreign-exchange strategist at Barclays.
In addition to political turmoil, the widening Canada-US interest rate gap continues to weigh on the loonie. The Bank of Canada’s decision to lower borrowing costs contrasts with US monetary policy, as markets anticipate further divergence between the two economies.
On Tuesday, inflation fell below the central bank’s target for the second time in three months, supporting the Bank of Canada’s aggressive rate cuts.
Jim Caron, chief investment officer of cross-asset solutions at Morgan Stanley Investment Management, highlighted these combined risks.
“The Canadian economy is skating on thin ice at this point, and it’s getting worse with the political turmoil there,” he said. Caron added that Canada’s political instability amplifies the rate gap issue.
The loonie's implied volatility spiked on Tuesday, reaching its highest level in more than a year.
Brad Bechtel, global head of FX at Jefferies, suggested the currency could fall further amid low liquidity.
“Holiday liquidity” conditions could push the loonie to 1.4668 per US dollar in the coming weeks, he noted—a level last reached on March 19, 2020.
“[The Canadian dollar] is suffering devaluation by a thousand cuts,” wrote Kit Juckes, head of currency strategy at Societe Generale.
“The Bank of Canada has taken away rate support, tariff uncertainty weighs and the government is struggling to stay unified.”
