Trudeau Steps Down Ahead of Trump Inauguration

The Canadian Dollar rose 0.6% against its US counterpart (USDCAD) on Monday, 6 January, following the resignation of Canadian Prime Minister Justin Trudeau as leader of the Liberal Party.

Trudeau has faced backlash regarding how to prepare for potential tariffs under US President-elect Donald Trump after the victor warned of such on the heels of his re-election. However, Trudeau has been under pressure for a while as his government has failed to spur economic growth, leading to two consecutive 50-basis point interest rate cuts by the Bank of Canada (BOC). 

While his decision may not have been surprising after weeks of internal pressure, Canada had announced a $1.3 billion package to stop the flow of migrants and illegal drugs into the US following Trump’s tariff warning. 

Trudeau Exits Amid Tariff-Led Political Fallout

Trudeau’s resignation follows the exit of his deputy PM Chrystia Freeland in December 2024 over the government’s response to the potential 25% tariff of US President-elect Donald Trump. Following his re-election win, Trump said he would pass an executive order to impose a 25% tariff on all imports from Canada to the US. Around 80% of Canadian exports are shipped to the US. However, rumour had it that Trudeau failed to improve ties with Trump at a November meeting in Florida, resulting in an internal dispute with Freeland on how to brace for tariffs. 

Some analysts point to the Canadian elections scheduled to take place before the end of October to explain Trudeau’s resignation. Canada’s finance and foreign affairs minister met with Trump’s commerce and interior secretaries to calm the waters. However, it appears that Conservatives have closer ties with Trump, and with Vice President-elect JD Vance in particular. Trudeau’s Liberal Party, in fact, lagged behind the opposition Conservative Party by around 24% in a 2025 polling, according to CBC News, with Pierre Poilievre notching a 44.2% approval rate over Trudeau’s 20.1%, whom New Democrat Jagmeet Singh closely followed at 19.3%.

The Canadian parliament will remain suspended until a new Liberal Party leader is chosen to replace Trudeau by March 24. Former Bank of England (BOE) governor Mark Carney, foreign minister Melanie Joline, and former deputy prime minister Chrystia Freeland have been discussed as possible replacements.

Conservatives Rise as Economic Risks Loom

Some analysts believe that the resignation of Trudeau will benefit the Canadian economy as Trump is expected to be inaugurated on 20 January. In particular, poll-leading Poilievre has previously called for a hawkish BOC and a firmer Loonie. As a Conservative, his alignment with Trump’s tariff threats would ease friction between the US and Canada and allow the Canadian dollar’s post-Trump weakness to correct itself.

Goldman Sachs (GS) published a note on 3 January, stating that Trump’s tariffs, should they be implemented, carry a substantial downside risk for growth in Canada. The note also pointed to a less severe tariff than the 25% proposal. However, the bank warned that currently, markets appear to price in a 25% tariff boost with a 5% probability. (Source: Yahoo Finance)

Meanwhile, the US dollar (DX) also came under pressure on Monday following a Washington Post report that tariffs would apply only to critical sectors to US security or the US economy. The greenback had been trading higher in the first few sessions of 2025, partly due to higher tariffs from the incoming administration. However, Trump denied on Monday that his team was exploring such an option, though this didn’t change the course of price action. 

The Republican is expected to go through his pre-win pledges of 10%-20% global tariffs. However, some analysts still note favourable trade terms under a new government in Canada. Others point to the existing United States-Mexico-Canada Agreement (USMCA) agreement, which is due for review in 2026, suggesting inconsistency with a previously negotiated agreement with Trump. At the end of the day, 4.5 million jobs could be at risk if a 25% tariff is imposed, and Trump may be seeking to gain leverage heading into negotiations after his inauguration.

Conclusion

Trudeau resigned, but his exit could be a turning point for Canada as the country faces economic and political challenges. While his departure could improve relations with the incoming Trump administration, uncertainty looms ahead of the October elections.

With Conservatives gaining support, some analysts see the potential for reduced tensions due to a more US-aligned approach to trade policy. However, questions linger over the long-term implications of Trump’s tariff strategy, particularly with the USMCA agreement set for review in 2026.