The recent resignation of Chrystia Freeland, Canada’s Deputy Prime Minister and Minister of Finance, has sent shockwaves through the nation’s economy, impacting the Canadian dollar significantlyOn November 17, the value of the Canadian dollar fell below the 0.70 mark against the US dollar for the first time since the pandemic, indicating a troubling trend in Canada’s economic landscape.

Freeland’s unexpected resignation was publicly announced in a letter addressed to Prime Minister Justin Trudeau on November 16. In her communication, Freeland revealed that substantial disagreements had developed between her and Trudeau over the best path forward for Canada in recent weeks, which ultimately led to her decision to step down.

In her letter, Freeland emphasized the critical state of the Canadian economy, particularly in light of the new US administration's aggressive economic nationalism, which poses threats, such as the potential for 25% tariffs on imports from Canada

She stressed the importance of preparing for potential trade wars and maintaining fiscal stability, which is essential for Canada to navigate the complexities of these threats effectively.

Commenting on the current economic situation, Karen, Chief Investment Officer at Morgan Stanley Investment Management, pointed out that Canada’s economic climate is in a perilous state, exacerbated by the ongoing political turmoilThe resignation of a key figure in the government raises further doubts about the stability required to address such challenges head-on.

Since November 5, the Canadian dollar has depreciated by 3.4%, and its decline throughout the year has reached a staggering 7.6%. Analysts highlight that factors such as the strength of the US economy and the resulting robust dollar, along with the widening interest rate differential between the two countries, have played significant roles in the ongoing depreciation of the Canadian dollar.

According to the chief economist of Bank of Montreal, Porter, the recent performance of the Canadian dollar against the US dollar has begun to show a distinctly Canadian character

This suggests that unique domestic factors, in addition to broader market trends, may be at play in influencing the currency's trajectory.

Last week, the Bank of Canada made a bold move by cutting the benchmark interest rate by 50 basis points, lowering it from 3.75% to 3.25%. This aggressive rate cut strategy places Canada among the leading developed economies that are turning towards easing monetary policies to combat economic slowdownThe latest inflation data supports this decision; Statistics Canada reported a year-on-year rise of 1.9% in the Consumer Price Index (CPI) for November.

The market is anticipating that the interest rate gap between Canada and the United States will continue to expand, as currently, the ceiling for the lending rates is 3.25% for Canada against 4.75% for the Federal Reserve in the USPorter has posited that the depreciation of the Canadian dollar, to a certain extent, can be correlated with the political uncertainties brought upon by Freeland's resignation, but there are also underlying issues related to the Bank's decisiveness in cutting interest rates and looming tariffs that contribute to this decline.

Looking into the future, Porter expressed uncertainty regarding what factors might reverse the current trend of the Canadian dollar

He fears that without some relief on tariffs or positive economic news to buoy the currency, it may continue its downward spiralThe pressures mounting from the US’s potential tariff reforms indicate that Canada is indeed at a critical crossroads.

On the day of Freeland's resignation, the Canadian government also released its Fall Economic Statement, projecting a projected deficit of CAD 61.9 billion for the 2023-2024 fiscal year, which exceeds the government’s initial target by over CAD 20 billionMoreover, the report outlined plans to increase spending by more than CAD 20 billion, which includes CAD 1.3 billion allocated over six years for border security—a move perceived as an acknowledgment of the mounting pressures and commitments faced by the Canadian Federal Government.

In a striking ultimatum, the United States recently indicated that, unless Canada and Mexico take substantial measures to curb cross-border immigration, there will be a 25% tariff imposed on all products entering the US from both nations starting from January 20, 2025. Such an announcement adds to the urgency of the matters at hand, raising significant concerns for Canada’s economic stability.

According to a report by strategist Pumper, following the recent political upheaval, the likelihood of implementing such tariffs has substantially increased

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He asserted that without a more stable political leadership in Canada, extreme trade measures are likely to persist in dealings with one of the country’s largest trading partnersPumper forecasts that Canada may undergo early elections in the first quarter of 2025, which could lead to a more stringent fiscal policy in response to these pressing economic issues.

In the wake of Freeland’s departure, her longtime associate, Dominic LeBlanc, the Minister of Public Safety, has stepped into the new role of Finance MinisterLeBlanc had previously dined with Trudeau at Mar-a-Lago in Florida last month when discussions regarding Canada’s economic direction were in the airMeanwhile, Freeland has confirmed her intent to remain as a member of parliament, ensuring that she will not be stepping away from the political arena entirely.

Forex strategist Skoning from Barclays Bank remarked that the political upheaval indicates that the Canadian dollar is facing increased challenges