Will Trump's Victory Send the Canadian Dollar Plummeting?

As the dust settles on the recent election, economists are turning their eyes to the potential economic fallout stemming from Trump's win, particularly in terms of U.S.-Canadian trade relations and its effects on the Canadian dollar, or "loonie". According to TD economist Marc Ercolao, the prospect of new tariffs on Canadian goods is a serious concern.

"A big near-term question is how Trump’s tariff policy will jolt U.S.-Canadian trade relations," Ercolao notes. He emphasizes that while the current USMCA trade agreement might insulate Canada from tariffs—given certain concessions are made by 2026—the risk of tariffs remains a very real danger. If imposed, they could have immediate negative impacts on Canada’s GDP, inflation rates, and overall trade dynamics.

Furthermore, Ercolao predicts that ongoing American inflation could significantly alter the landscape for Canadian currency. With forecasts showing a slower pace of U.S. rate cuts in 2025 and a widening spread between the Bank of Canada and the Federal Reserve, the Canadian dollar may struggle. "It would not surprise us to see the CAD temporarily break below 70 cents in the near-term," he warns.

In a broader economic context, Morgan Stanley's chief investment officer Michael Wilson highlighted an unexpected performance surge in large-cap, higher-quality cyclical stocks following the election results. "The outcome was not priced in," Wilson explained, suggesting that this presents an opportunity for sectors such as Financials, Industrials, and commodities to see further upside as regulatory pressures ease and market confidence increases.

In the realm of commodities, BofA Securities strategist Warren Russell observed a volatile oil market in the second half of 2024, influenced by geopolitical risks and supply concerns. "Brent crude prices have fluctuated significantly," Russell stated, referencing a recent range between $68 and $81 per barrel with current prices hovering around $74. "While geopolitical tensions remain high, we see inventory levels holding steady and would not expect any significant increase just yet.

Wall Street strategists are assessing the implications of Trump's election on stock performance, with many noting that the S&P 500 could stay supportive until the ten-year U.S. bond yield hits 5%. J.P. Morgan's Mislav Matejka indicated the importance of bond yield behavior in determining the market's trajectory. "If yields approach 5%, it could raise challenges for risk assets. Small caps saw a rally post-Trump’s 2016 election, and we believe a similar outperformance could happen again," he noted.

In conclusion, while Trump's victory entails various potential benefits, the broader implications for both the Canadian dollar and the stock market warrant close attention in the coming months. Will the loonie weather the storm, or are we facing a significant downturn ahead? The financial world will be watching closely.