Canadian 5 Bank Forecast, November 2024

The domestic ripple effects of Trump’s economic policies

Donald Trump’s potential return to the presidency could significantly reshape the US economy, with a strong focus on protectionism and domestic industry. His proposed universal tariffs on imports, ranging from 10% to 20%, aim to reduce reliance on foreign goods and protect American jobs. While this may bolster domestic manufacturing in the short term, it risks triggering inflation by increasing the cost of imported goods for consumers. Additionally, speculation about deliberate dollar devaluation to make US exports more competitive could bring temporary relief to manufacturers but create long-term risks. Higher import costs and inflation, coupled with a potential loss of trust in the dollar’s global reserve status, may undermine the very economic stability these policies seek to strengthen.

Canada and the looming challenges

Canada’s economy, which is deeply intertwined with the US, could face severe challenges under Trump’s trade policies. With 75% of Canadian exports destined for the US, proposed tariffs or new trade restrictions could weaken the Canadian dollar (CAD). Further, Canada’s heavy reliance on oil exports makes its economy vulnerable to Trump’s energy policies, prioritizing increased US production. Lower global oil prices, spurred by US overproduction, could reduce demand for Canadian oil, applying downward pressure on the CAD. While Canada’s central bank may take measures like interest rate cuts to support its economy, these efforts could be outweighed by global market uncertainty, especially if Trump’s policies strain US-Canada trade relations.

The Euro to Canadian Dollar (EUR/CAD) exchange rate could also face volatility under Trump’s influence. His proposed tariffs and protectionist policies might disrupt trade between the US, Canada, and the EU, weakening both the Euro and the Canadian Dollar against the US Dollar. This disruption could increase volatility in the EUR/CAD pair as both currencies respond to shifting trade dynamics and investor sentiment. Canada’s oil-dependent economy, in particular, might feel the effects of Trump’s energy policies, which could alter global oil prices and, consequently, the CAD's value.

Similarly, the British Pound to Canadian Dollar (GBP/CAD) exchange rate, currently around 1.80, may experience short-term fluctuations influenced by Trump’s policies and geopolitical developments. The Canadian Dollar, closely tied to oil prices and trade, could face added pressure if Trump’s actions disrupt global trade or create volatility in energy markets. Additionally, the uncertainty surrounding Trump’s potential return to power might drive investors toward the US Dollar as a safe haven, indirectly affecting both the Pound and the Canadian Dollar. While the Pound’s performance depends on UK economic conditions, the Trump factor introduces unpredictability, heightening the potential for volatility in the GBP/CAD pair.