CAD: Carney's Leadership Bid Not a Game Changer

Mark Carney, the former governor of the Bank of Canada (BoC) and the Bank of England, officially announced his candidacy for the leadership of Canada's Liberal Party yesterday. He aims to replace Justin Trudeau as the party's leader, a contest that is likely to be a closely contested battle with former finance minister Chrystia Freeland. Recent polling shows Carney holding a narrow lead while betting markets give him a stronger edge, with a 70-30 probability of winning the leadership race. 

Despite the media attention surrounding his candidacy, the financial markets appear to view Carney's potential leadership in a more muted light, with little indication that his run will drastically alter the outlook for the Canadian dollar (CAD) or the broader economic landscape. In this piece, Mason Harper, a broker at PrimeUnityGroup will guide you through this subject in detail.

A Close Race for Leadership

Carney's entry into the Liberal leadership contest has generated significant interest, especially given his experience in managing central banks and his reputation as a technocrat with global credibility. The contest between Carney and Freeland appears to be neck-and-neck, but Carney's experience with monetary policy and international finance is viewed as a potential advantage for him within the market-friendly Liberal establishment.

Freeland, on the other hand, has had a more prominent role in Canada's dealings with the United States, particularly during the Trump administration when she played a key role in negotiating the US-Mexico-Canada Agreement (USMCA). Her more combative stance toward former President Trump and her vocal stance on trade and domestic policy put her at odds with some members of the Liberal base. This makes Carney the more market-friendly choice, as his history with financial markets and central banking aligns better with investor expectations for stability and predictability.

Limited Impact on CAD in the Short-Term

Despite Carney's strong standing in the race, the broader outlook for the Canadian dollar (CAD) is unlikely to be significantly altered by his candidacy, at least in the short term. The foreign exchange markets have been relatively stable thus far in 2025, with USD/CAD remaining flat since the start of the year. This stability is likely reflective of the broader uncertainty surrounding Canadian domestic politics and the evolving global economic environment.

One of the key factors impacting CAD in the current environment is the elevated risk premium associated with US-Canada trade relations, particularly under the influence of former President Donald Trump's trade policies. According to a short-term fair value model, there remains a 3% risk premium embedded in the USD/CAD exchange rate. This risk premium reflects ongoing concerns regarding the potential for further trade tariffs, especially in the context of the recent political rhetoric from Trump's camp regarding protectionist measures.

The US-Canada Trade Relationship and Risk Premium

Even though the possibility of the United States imposing unilateral 25% tariffs on Canadian goods remains low, smaller tariffs or trade restrictions could still have significant negative consequences for the Canadian economy. In 2023, exports to the US accounted for around 20% of Canada's gross domestic product (GDP), meaning that any disruption to this vital trading relationship would disproportionately hurt the Canadian economy. The economic consequences of such measures would be felt more acutely than in other economies due to the deep trade and investment ties between the US and Canada.

Carney's leadership bid may be seen by some as a stabilizing force in Canadian politics, especially regarding trade. However, until there is more concrete evidence that the US-Canada trade relationship is stabilizing or improving, the CAD will likely continue to face significant risks. Without clear signs of a lighter-touch approach from the US administration on trade, the Canadian dollar is expected to remain in a state of limbo, with investors cautious about further disruptions.

Conclusion: No Major Shift for CAD

As of now, the CAD remains in a holding pattern, with markets waiting for more clarity on both domestic and international factors. Carney's leadership bid is unlikely to be a game-changer for the currency, as the market has already priced in a risk premium associated with trade uncertainties and a potentially shifting political landscape in Canada. 

While Carney's experience could bring a sense of stability and market-friendliness, the looming risks related to US tariffs and the overall political climate make the short-term outlook for the loonie remain uncertain. Until there is more substantial evidence of a de-escalation in trade tensions, we expect the CAD to continue facing headwinds, with USD/CAD finding support around the 1.430 mark.