The Canadian dollar falls to a new low in over four years under the dual pressure of economic and political risks

On Tuesday Eastern Time, under the dual pressure of economic and political risks, the Canadian dollar continued its recent decline against the US dollar, falling another 0.4% to break through 1 USD to 1.43 CAD, reaching its lowest level since March 2020. The Canadian dollar has cumulatively dropped over 7% this year, likely to record its worst annual performance since 2018.

Due to poor economic performance and the government's inability to come up with a plan to address the threat of tariffs from Trump, the Canadian dollar has been weakening recently. Barclays foreign exchange strategist Skylar Montgomery Koning stated, "We believe the Canadian dollar will continue to be under pressure."

Finance Minister's Resignation Triggers Political Turmoil

Behind the depreciation of the Canadian dollar, political turmoil is a significant factor. Before Trump even officially took office as President of the United States, the Canadian government experienced an "internal conflict," as Canadian Finance Minister Chrystia Freeland unexpectedly announced her resignation on Monday Eastern Time, shocking the market. Since taking office in 2020, Freeland has been responsible for leading the cabinet in formulating strategies to respond to US policies.

However, in her resignation letter, Freeland expressed strong opposition to the short-term spending policies promoted by the Trudeau government, which include tax cuts that expand the budget deficit. Her resignation not only revealed divisions within the government but also heightened market concerns about the outlook for the Canadian economy. The political instability has put pressure on the Canadian dollar, and the market generally believes that unless the Canadian political situation is repaired, it may face greater economic challenges in the future.

In addition, the depreciation of the Canadian dollar is influenced by multiple factors. First, compared to the US, the Canadian economy is relatively weak. This gap leads investors to prefer holding US dollar assets, thereby pushing up the exchange rate of the US dollar against the Canadian dollar.

Second, President Trump has threatened to impose a 25% tariff on Canadian goods. Deutsche Bank strategist Michael Puempel pointed out in a report to clients on Tuesday that as Canadian political turmoil intensifies, this threat is more likely to become a reality, and Trump is likely to continue to exert pressure on Canada, especially in trade matters. Canada may hold early elections in the first quarter of 2025 and ultimately implement tighter fiscal policies.

Kit Juckes, head of currency strategy at Société Générale, stated, "The Canadian dollar is suffering from a thousand cuts of depreciation. The Bank of Canada has removed interest rate support, there is significant uncertainty regarding tariffs, and the government is struggling to maintain unity."

Third, the Bank of Canada is cutting interest rates, and the market expects the interest rate gap between Canada and the US to widen further. This reduces the attractiveness of the Canadian dollar relative to the US dollar. Fourth, Canada's inflation rate has fallen below the central bank's target for the second consecutive time, supporting further interest rate cuts by policymakers but also putting more depreciation pressure on the Canadian dollar