Loonie Tumbles to Two-Year Low as Trump Win Changes US Dollar’s Trajectory

(Bloomberg) - The Canadian dollar slumped to its lowest in two years against the US currency after Donald Trump surged to victory in the American presidential election.

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The loonie traded as low as C$1.3959 per US dollar on Wednesday morning as the greenback strengthened in response to the Republican candidate's decisive win. It also reached that level on Nov. 1, which marked its lowest intraday price since October 2022.

The US dollar surged against the majority of the world's currencies following Trump's victory, including all G-10 currencies. The loonie was down about 0.8% in late morning trading New York time, the smallest hit among the G-10. The British pound, euro and Japanese yen were all down by more than 1%.

Bank of Montreal economists said Canada's economy might benefit initially from stronger American growth, as the US buys three-quarters of Canada's merchandise exports. However, in the medium term, the country might be one of the hardest hit from Trump's protectionist policies.

"Increased uncertainty about tariffs and the fate of the US-Mexico-Canada Agreement ahead of the 2026 review could depress capital flows to Canada and weaken domestic investment, likely extending the nation's productivity slump," analysts led by Chief Economist Doug Porter wrote.

"Suffice it to say, none of this is good for the Canadian dollar, which is already challenged by faster rising unit labor costs relative to the US."

While tariffs and a softer loonie might add some upward pressure to prices, economic weakness may still hold inflation below the 2% target, keeping the Bank of Canada in easing mode, the Bank of Montreal economists said.

"The bank expects the economy to strengthen on the back of further planned rate cuts, and any threat to its outlook could spur a more aggressive response."

The Bank of Canada has cut rates four times since June, including a 50 basis-point reduction last month, bringing its key policy rate to 3.75%. Governor Tiff Macklem is looking for consumer spending and business investment to pick up.

At an event in Toronto on Wednesday, the central bank's second in command said Trump's election may actually remove some worries about Canada's economy.

"A big piece of uncertainty has been taken away. We now know what we're dealing with," Senior Deputy Governor Carolyn Rogers said, adding that it's yet to be seen how the president-elect governs and sets policy relative to his campaign.

She reiterated policymakers' view that the divergence between the Bank of Canada and Federal Reserve's interest rate policies has a limit, but she doesn't think "we're anywhere near that limit now."

The spread between yields on Canadian government two-year notes and US treasuries of the same tenor was about 1.096 on Wednesday, near the widest since 1997.

Traders in overnight swaps put the odds of another outsize rate cut in December at about 50%, but BMO said a more cautious path of 25 basis-point moves in the coming months is sensible given the post-election uncertainty and heightened risk to the loonie.

Bob Dugan, chief economist at Canada Mortgage & Housing Corp., said Trump's planned cuts to corporate tax rates would create a fairly large gap between Canada and the US.

"So that could really have an impact on where businesses decide to locate," he said at an event in Toronto, adding that Canada may have to react with its own measures.

"That certainly causes risk to our corporate investment here," he said. "And ultimately in a country where we have a productivity problem — Canada's got a very low productivity rate — if we don't get the investment, that's going to persist and that's going to limit our long-term GDP growth potential."

-With assistance from Christine Dobby and Jay Zhao-Murray.

(Adds comments from Bank of Canada's Rogers starting in 10th paragraph.)

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