TD Bank economists are worried about the Canadian dollar

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Donald Trump will no doubt have wide-ranging implications for the global economy, interest rates and how currencies respond to the U.S. dollar as he assumes control.

Since Canada is very aligned with its largest trading partner, it’s easy to understand why economists at Toronto-Dominion Bank are looking askance at the Canadian dollar‘s prospects if Trump begins to wield his arsenal of promised trade policies.

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“It would not surprise us to see the loonie break below 70 cents (U.S.),” TD Bank economists said in a report the day after the U.S. election.

The Canadian dollar fell perilously close to that level on Wednesday, retreating almost one per cent to 71 U.S. cents before regaining some strength Thursday.

The loonie was the victim Wednesday of a surging U.S. dollar, which recorded its best day against major currencies since 2020, as markets digested the Republican candidate’s win. Traders got a jump start on stated plans by Trump to cut taxes and increase spending. The expectation is that those policies will fuel inflation, leading to fewer interest rate cuts than investors thought, and ultimately supporting a stronger U.S. dollar.

Prior to the U.S. election, the loonie’s future path was already a concern. But with Trump’s resounding win combined with Republican control of the Senate and possibly the House of Representatives, it’s the president-elect’s plans for tariffs that have TD economists on edge about the Canadian dollar’s prospects.

“The nail biting is over, and now the concern is real,” they said.

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Trump has touted an across-the-board 10 per cent tariff on all goods entering the U.S., and up to 100 per cent to 200 per cent on products from China.

TD said a tariff of 10 per cent imposed by a Trump administration on all its trading partners would reduce exports from Canada to the U.S. by nearly five per cent “by early-2027, relative to our current baseline forecast,” with any tit-for-tat moves by Canada likely resulting in a further drop in export volumes.

“Slowing import activity mitigates some of the negative net trade impact on total GDP that helps avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” the economists said.

Gross domestic product (GDP) is already a problem for the Canadian economy. The Bank of Canada cut interest rates by 50 basis points at its Oct. 23 policy meeting, citing a slumping economy in “excess supply.”

Now, TD economists are worried that a tariff-induced drop in GDP could force the Bank of Canada to cut interest by 50 basis points to 75 basis points more than TD was forecasting.

Lower rates could also widen the spread between the Canadian dollar and the U.S. dollar, “putting additional downward pressure on the Canadian dollar.”

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TD is forecasting the Bank of Canada’s benchmark interest rate to end the year at 3.5 per cent and reach its terminal rate of 2.25 per cent by the end of next year. But another 50-to-75 basis points of cuts could put the rate as low as 1.5 per cent.

However, market analyst Karl Schamotta, chief market strategist at Corpay Inc., said it appears foreign exchange traders are betting on more of a targeted tariff approach from Trump rather than a universal application, as “currencies most vulnerable to a potential rise in U.S. protectionism — such as the Mexican peso, Canadian dollar, and Chinese yuan — moved less than expected” during (Wednesday’s) session.

“While a blanket tariff might harm individual trading partners, the cumulative impact of retaliatory actions could damage the U.S. economy just as severely,” he said in a note on Thursday. “Instead, the market seems to be pricing in a more targeted approach, with protectionist actions focused on China and countries with significant transshipment flows.”

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The United States Federal Reserve cut its benchmark lending rate by a quarter percentage point Thursday, extending efforts to keep the U.S. economic expansion on solid footing.

Officials voted unanimously to lower the federal funds rate to a range of 4.5 per cent to 4.75 per cent. The adjustment follows a larger, half-point cut in September.

“The committee judges that the risks to achieving its employment and inflation goals are roughly in balance,” the Federal Open Market Committee said in a statement. “The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate.” — Bloomberg

Read the full story here.

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• Today’s data: Statistics Canada releases jobs numbers for October
  
• Earnings: Telus Corp., Aimia Inc., Brookfield Renewable Partners, High Liner Foods Inc., Brookfield Business Partner, Emera Inc., Constellation Software Inc.
  

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Today’s Posthaste was written by Gigi Suhanic, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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