If there is to be one casualty from a Donald Trump win (especially a GOP sweep on Congress), it is the Canadian dollar — which has already been under pressure from the fact that Canada’s GDP is expanding at a mere 1% annual rate versus close to 3% south of the border. And the growth gap has already generated a deepening interest rate gap between the two countries as the Bank of Canada turns more dovish and the Fed becomes more circumspect.
If a Trump win does trigger a move for a further cut in the top corporate marginal tax rate to 15% from 21%, that would drive a further wedge in the competitiveness gap as well (Canada’s top rate is 38%). Tack on the deregulation thrust in the Trump platform at a time when the Canadian government is directionless on this matter, and the negative productivity gap will also widen under a GOP win.
The math is quite simple because the implications of a further increase in Canada’s unit labor cost competitiveness gap will necessarily require a weaker currency as a balancing force (in essence, a weaker Canadian dollar makes us poorer but allows Canadians to maintain its market share globally by cutting its price). Failure of Ottawa to respond (which it won’t) will only reinforce direct investment outflows and act as a further weight on the currency.
No matter who wins, it looks as though the free-trade agreement (USMCA) will come under review, and that is not so good for either Canada or Mexico, for that matter — seeing as the United States absorbs 80% of the export base of both countries. Then there are the tariff threats, and that would be met with a stronger U.S. dollar and weaker Canadian dollar by extension, as a logical response in the FX market.
Then, of course, as we saw from 2016-2020, Trump’s “drill baby drill” strategy will lead to lower oil prices and undercut Canada’s terms-of-trade, being so reliant on the commodities sector.
The loonie has already been on a weakening path, but a Trump win in particular will only reinforce that trend, and a move to C$1.50 (or 66.6 cents US) from just under C$1.40 now seems like a good bet.
David Rosenberg is founder of Rosenberg Research.
More from David Rosenberg and Rosenberg Research:
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