• Careers FAQs Client login
Canada at the Crossroads – Potential Market Implications of the 2025 Federal VoteCanada at the Crossroads – Potential Market Implications of the 2025 Federal VoteCanada at the Crossroads – Potential Market Implications of the 2025 Federal VoteCanada at the Crossroads – Potential Market Implications of the 2025 Federal Vote
  • Home
  • Services
    • Foreign Currency Risk Management
    • Interest Rate Risk Management
    • Event Driven Risk Management
    • Fund Finance Services
    • Investment Products
  • Industries
  • Our Technology
  • About
    • Who we are
    • Culture
    • Careers
  • Our Team
  • News & Insights
CONTACT US
✕
            No results See all results
            Transitory is back-proceed with caution
            26 March 2025
            “Liberation Day” – Post Event Update
            3 April 2025
            1 April 2025
            Categories
            • Insights
            Tags
            RISK INSIGHT • 02 April 2025

            Canada at the Crossroads – Potential Market Implications of the 2025 Federal Vote

            Harun Thilak Portrait

            Harun Thilak, Head of Global Capital Markets NA

             

            The Canadian federal election, scheduled for April 28, 2025, is poised to be a pivotal event with significant implications for the Canadian dollar and domestic interest rates. Set against a backdrop of heightened tensions with the United States over trade and tariffs, this election pits the ruling Liberal Party, led by recently appointed Prime Minister Mark Carney, against the opposition Conservative Party, led by Pierre Poilievre. With recent polling data showing a very tight race between the Liberals and Conservatives, the final election outcome could influence monetary policy, fiscal stability, and economic confidence—critical drivers of currency valuation and borrowing costs. To understand these potential effects, it is useful to consider historical election contexts in Canada and analyze the fiscal policy, immigration, and tax proposals of the two leading parties.

            Echoes of elections past

            Canadian federal elections have typically revolved around domestic economic concerns and navigation of international pressures. The 1988 election, dominated by debates over the Canada-U.S. Free Trade Agreement, saw the Progressive Conservatives under Brian Mulroney secure a majority, bolstering confidence in cross-border trade and stabilizing the Canadian dollar. Conversely, the 1993 election marked a shift as the Liberals, led by Jean Chrétien, capitalized on economic discontent following a recession, ushering in a period of fiscal restraint. These examples illustrate how Canadian elections can act as inflection points, with policy shifts influencing investor sentiment and macroeconomic outcomes. The 2025 Canadian election, occurring amid U.S. tariff threats and a leadership transition from Justin Trudeau to Mark Carney, echoes these past dynamics, blending domestic priorities with international uncertainties.

            Spending vs saving: Where do Carney and Poilievre stand?

            The Liberal Party, under Carney, emphasizes strategic investment over widespread spending cuts. Carney has proposed a substantial fund to shield the auto sector from U.S. tariffs, alongside a dual-budget approach that separates capital and operational spending to bolster economic resilience. In contrast, the Conservative Party’s fiscal hawkishness, led by Poilievre, centres on eliminating the carbon tax, reversing capital gains tax hikes, and balancing the budget within a decade through spending reductions and deregulation.

            While the Liberals aim to stimulate growth through targeted investments, the Conservatives prioritize fiscal discipline, potentially reducing government debt but risking short-term economic slowdown. A Liberal victory could sustain higher deficits, exerting upward pressure on interest rates and possibly forcing a shift from the Bank of Canada’s recent dovish bias. Conversely, a Conservative win might ease such pressures but could weaken the Canadian dollar if growth falters, leading to continued reliance on accommodative monetary measures.

            Open doors or upper limits? Canada’s competing immigration approaches

            Immigration policy also highlights stark differences between the two contenders. Despite recent cuts reducing permanent resident targets for 2025, the Liberals maintain a pro-immigration stance, framing it as essential for sustaining labor supply and economic vitality. Carney has acknowledged past strains on housing and services, suggesting a balanced approach. In contrast, Poilievre advocates capping immigration, criticizing rapid population growth for exacerbating housing costs and infrastructure strain.

            A Conservative cap could slow labor force expansion, potentially dampening GDP growth and weakening the Canadian dollar against the U.S. dollar, especially if U.S. trade policies already constrain exports. Meanwhile, the Liberal policy, while supporting long-term growth, risks inflation if housing shortages persist, possibly prompting the Central Bank to raise rates.

            The tax tussle

            Tax policy further delineates the parties’ visions. The Liberals have retreated from some of Trudeau’s tax hikes, with Carney scrapping planned capital gains increases to bolster investor confidence amid trade tensions. Poilievre’s Conservatives promise broader tax relief, including ending the carbon tax and reducing regulatory burdens to spur industry and homebuilding.

            While the Liberal approach may stabilize markets in the short-term, unchecked deficits could push up borrowing costs. Meanwhile, Conservative tax cuts could boost disposable income and business activity, potentially strengthening the dollar if paired with robust growth. However, strict fiscal tightening might limit public investment, tempering economic momentum.

            Loonies and lending

            The Canadian dollar’s trajectory will largely hinge on perceived economic stability and trade outcomes. A Liberal majority could initially weaken the currency, given higher spending and continued uncertainty over U.S. tariffs, though Carney’s global economic credentials may temper depreciation. A Conservative victory might bolster the loonie if markets embrace fiscal restraint, but any trade retaliation could offset gains.

            Interest rates may face upward pressure under either scenario, particularly if inflation persists. Liberal spending plans could increase that pressure more than Conservative austerity, potentially prompting a shift from the Bank of Canada’s recent accommodative stance. The Bank has already lowered policy rates by 200 basis points since June 2024, and market participants anticipate another 50 basis point cut in 2025.

            In conclusion, the 2025 election outcome will reverberate across Canada’s financial landscape. The Liberals’ investment-focused strategy contrasts with the Conservatives’ leaner fiscal vision, each carrying distinct risks and rewards for the Canadian dollar and domestic interest rates. Meanwhile, USD-based investors can hedge against CAD weakness via FX forwards, where carry levels are particularly attractive at present.

            Chart 1: USDCAD FX Forwards Carry Cost (in annualized bps)

            Canada market implications - USDCAD FX Forwards Carry Cost (in annualized bps)

            Source: Bloomberg, Validus Risk Management

            Be the first to know

            Subscribe to our newsletter to receive exclusive Validus Insights and industry updates.

              Share

              Related posts

              21 May 2025

              Turbulent treasuries: why America’s IOUs are rocking the boat


              Read more
              14 May 2025

              Double shot of stimulus: Will a rate cut and tariff truce ignite the UK economy?


              Read more
              7 May 2025

              Carney’s cash play: Liberals’ surprise win and the price tag for Canada’s future


              Read more
              Validus-white-logo
              Follow us on  
              Services

              Foreign Currency Risk Management

              Interest Rate Risk Management

              Event Driven Risk Management

              Fund Finance Advisory

              Investment Products

              Industries

              Private Capital

              Pensions Funds

              Corporates

              Our Technology

              RiskView

              TradeView

              PortfolioView

              London

              Windsor, UK

              Toronto, Canada

              New York, US

              Oslo, Norway

              Singapore

              24 Torrington Place
              3rd Floor
              London WC1E 7HJ
              T. +44 (0) 203 923 8575

              39 Sheet Street
              Windsor SL4 1BY
              T. +44 (0) 175 338 6548

              55 University Avenue,
              Suite 302
              Toronto
              Ontario M5J 2H7
              T. +(1) 416 646 0590

              110 W 40th St
              19th Floor
              New York
              NY 10018
              T. + 1 929-219-3793

              Slemdalsveien 70A
              0370 Oslo
              T. +47 21 05 15 09

              CapitaGreen
              138 Market Street
              Singapore, 048946

              WINNER

              Portfolio Monitoring / Risk Management

              DRAWDOWN AWARDS 2021

              WINNER

              Foreign Exchange Services

              DRAWDOWN AWARDS 2021

              WINNER

              Best Risk Management Software Provider

              PRIVATE EQUITY WIRE EUROPEAN AWARDS 2023

              WINNER

              Best Risk Management Software Provider

              PRIVATE EQUITY WIRE US EMERGING MANAGER AWARDS 2024

              WINNER

              Best Risk Management Software Provider

              PRIVATE EQUITY WIRE US AWARDS 2024

              T&Cs | Privacy Policy | Cookie Policy | Regulatory | Modern Slavery Policy

              Copyright 2025. All rights reserved. Validus Risk Management Limited is authorised and regulated by the Financial Conduct Authority (firm reference 555972), is licensed by the CFTC and is a member of the NFA (ID 0504990). Validus Risk Management Limited is incorporated in England and Wales (registration number 07140753), with its registered office at 39 Sheet Street, Windsor, SL4 1BY, United Kingdom.

              CONTACT US
                        No results See all results