In traded terms, the Canadian dollar is inverse to the U.S. dollar. So, a chart moving down is a stronger Canadian dollar. At about 8:20 p.m. (white line on chart) on Jan. 5, as I was watching the Leafs beat the Flyers, this Globe and Mail headline hit my news feed: “Trudeau set to resign.” The only relevant Canadian markets open at the time for investors to express an opinion were currencies. So, the Canadian dollar started to strengthen.
One might ask that if there is political uncertainty, should the currency not weaken? It would in general, unless market participants believed that a change in government was a good thing for the country.
Following the U.S. election, we saw the U.S. dollar strengthen under the promise of widespread tariffs on not just China, but everywhere. U.S. president-elect Donald Trump’s message that he was “tariff man” on social media platforms shook markets and the Canadian dollar paid the price.
Trudeau’s poor response was likely, in part, behind today’s resignation. No love lost between Trump and Trudeau to be sure. The market likely sees a Conservative government as better business, negotiating better trade terms and Canadian foreign investment overall, thus a boost for the currency. It looks like we’ll have a late April election by my back-of-the-envelope math.
Overnight, the Washington Post had a story that the Trump trade team would be less aggressive on tariffs and the U.S. dollar broadly weakened. You can see that move just after 6:00 a.m. when those headlines hit. When the press conference was announced this morning (red line), the Canadian dollar strengthened again, but minutes later, Trump messaged on social media that the Washington Post story was not accurate and that he was indeed “tariff man.”
For the next few months, these two competing forces will grind the Canadian dollar, but all this is known and I believe mostly fully priced-in to markets. When markets are fully priced, there is typically only one way to go.
Over the past 50 years of free-floating currencies, the Canadian dollar rarely stays here for too long. Long-term fair value is likely in the 1.25-1.3 range where the currency will likely move back to in the next few years. If you can, look for ways to hedge foreign currency exposure.
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