Round 2 for CAN vs Trump
Igor Manukhov - Dec 09, 2024
Despite all theatrics and drama, the Canadian dollar held its ground against Trump during his first term (CAD went up). I don’t see it being much different this time around.
After Donald Trump was elected to be the next President of the United States, the Canadian dollar tanked against the USD. In fact, the loonie lost 6% against the greenback so far in 2024. As a result, more clients and prospective investors becoming concerned about the prospects of the Canadian dollar.
I will stick out my next and argue Trump himself influencing the exchange rate between these two currencies. Yes, many of his proposed policies are inflationary, and the US economy remains much more robust than Canada’s, making it harder for the Fed to cut interest rates. On the contrary, the weaker Canadian economy might require additional support from Bank of Canada through further interest rate cuts. These two factors alone provide a grim outlook for the Canadian dollar against the greenback.
However, markets are rarely straight forward. Most of the time, investors place their bets with the outlook. Nothing that I have said in the previous paragraph is a secret. It is quite possible that most of this has been priced in already. After all, the USD is trading around a key resistance level of a 1.4 CAD (horizontal red line). Since 1982, it has only surpassed that level in the late 1990s. Historically, as shown in the chart, the USD rarely spends a lot of time above $1.4 CAD.
Furthermore, this is Trump’s second presidency, so the “novelty” of his presidency style wore off somewhat. By now, the world knows what to expect of him, and I would venture to say they are more prepared for him. But even when he was a “dark horse” of a president with all the trading war actions that he took, the Canadian dollar appreciated against USD during his first term (notice how black line went down between two vertical green lines).
I believe the real risk to think about is what to do with all the US investments. Over the last few years, the US market had dominated the world, leading to most portfolios being heavily weighted toward US assets. While I am still bullish on US stocks, a strong USD could become headwind for Canadian investors in the future.
