David Rosenberg: If Donald Trump wins, the Canadian dollar is in big trouble
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.
If Donald Trump were to secure a win, particularly if the GOP also sweeps Congress, one likely casualty could be the Canadian dollar. This is compounded by Canada's slow GDP growth rate of just 1% annually, compared to nearly 3% growth in the U.S. This growth gap has already resulted in an increasing interest rate disparity, with the Bank of Canada adopting a more dovish stance while the U.S. Federal Reserve takes a more cautious approach.
Should Trump win and push for a further reduction in the top corporate tax rate from 21% to 15%, the competitiveness gap between the U.S. and Canada could widen further. Canada’s top corporate tax rate currently stands at 38%. Additionally, Trump’s deregulation policies, at a time when the Canadian government lacks a clear direction on such matters, could also exacerbate the productivity gap.
The simple reality is that if Canada’s labor cost competitiveness continues to fall behind, the Canadian dollar will likely weaken as a balancing mechanism. A weaker Canadian dollar may make Canadians poorer but will help maintain global market share by lowering prices. If the Canadian government fails to respond, which is expected, it would likely lead to increased investment outflows and further pressure on the currency.
Regardless of the outcome, the future of the US-Mexico-Canada Agreement (USMCA) seems likely to come under review, which could negatively impact both Canada and Mexico since the U.S. absorbs 80% of their exports. Furthermore, potential tariff threats would likely strengthen the U.S. dollar and weaken the Canadian dollar in response in the foreign exchange market.
Additionally, Trump's "drill baby drill" energy policy, seen during his previous term, would likely contribute to lower oil prices, further undermining Canada's terms of trade due to its heavy reliance on the commodities sector.
While the Canadian dollar has already been on a downward trajectory, a Trump victory would likely accelerate this trend, and a move to C$1.50 (or 66.6 cents US) from the current level of just under C$1.40 now seems increasingly likely.
