What the 2025 Canadian Federal Election Means for Markets and the Canadian Dollar (CAD)?

Canada is set to hold its federal election on April 28, 2025, amid escalating tensions with the United States under President Donald Trump. With trade relations, fiscal policy, and cost of living dominating the national conversation, this election could have significant implications for the Canadian dollar (CAD), bond markets, and the Bank of Canada’s policy direction.

Liberal Party Leads in the Polls Under Mark Carney

According to the latest polls, the Liberal Party, now led by Prime Minister Mark Carney, is projected to win a parliamentary majority. CBC’s election model estimates the Liberals will secure between 151 to 226 seats, with a central projection of 191 seats, well above the 170-seat threshold needed for a majority.

In contrast, the Conservative Party, led by Pierre Poilievre, is projected to win 94 to 156 seats. The New Democratic Party (NDP) and Bloc Québécois are expected to lose ground, potentially leading to a rare Liberal majority government — a scenario already priced in by markets, which suggests limited short-term impact on CAD.

A Surprise Conservative Win Could Boost CAD

If the Conservatives pull off a surprise victory, it could lead to significant market movements, particularly a Canadian dollar rally. Investors speculate that a Poilievre-led government might have a better rapport with Trump, potentially improving Canada-US trade prospects.

Fiscal Policy Divide: Liberals Favor Stimulus, Conservatives Push Tax Cuts

Liberal Platform Highlights:

• 1 percentage point cut to the lowest income tax bracket.

• Elimination of the consumer carbon tax.

• 2025-26 budget deficit forecast at 1.96% of GDP, narrowing to 1.45% by 2029.

• Separation of operational and capital budgets, with a goal to balance the former within three years.

Conservative Platform Highlights:

• Larger tax cuts: 2.25 percentage points off the lowest bracket.

• Eliminate corporate carbon taxes and cut sales tax on home purchases.

• A proposed C$109 billion fiscal package, including C$75 billion in tax cuts and C$34 billion in spending.

• Introduction of a “Taxpayer Protection Act” to ban tax hikes without a referendum.

• Smaller projected deficits, relying heavily on C$56 billion in government spending cuts.

Foreign Policy: A Shared Tough Stance on Trump’s Trade Tariffs

Both parties are taking a strong stance against Trump’s protectionist tariffs, which are widely unpopular in Canada. As acting Prime Minister, Carney has already implemented C$60 billion in retaliatory tariffs and launched a C$5 billion Trade Diversification Corridors Fund to boost domestic and non-US trade.

The Conservatives propose an early renegotiation of the USMCA, aiming to pause tariffs during negotiations. While both parties agree on supporting Ukraine and increasing NATO spending to 2% of GDP by 2030, Carney’s pivot toward Europe may complicate future US-Canada trade talks under Trump.

Economic Risks: Vulnerability to US Slowdown and Rising Unemployment

Canada’s economy is highly exposed to the US, with 76% of exports headed south, equaling about 20% of Canadian GDP. Any disruption in trade could trigger a recession.

Key economic challenges:

• Rising unemployment due to labor oversupply.

• High levels of household debt.

• Risk of sharp spending pullbacks if job losses rise.

These factors may force the Bank of Canada to cut interest rates more aggressively than currently forecast. On the bright side, Canada’s fiscal health remains strong, allowing room for stimulus if necessary.

Market Impact: CAD Volatility Elevated Ahead of Election

While a Liberal majority is largely priced in, markets are signaling higher-than-normal volatility in CAD. One-week implied volatility for CAD is trading 30% above historical norms, compared to previous Canadian elections.

Scenario Analysis:

• Liberal Majority (Baseline): Limited FX impact, as already priced in.

• Conservative Upset: Likely CAD rally due to improved sentiment on US-Canada trade.

• Market Risk: Conservative fiscal projections could be seen as too optimistic, risking a bond selloff that might offset FX gains.

Conclusion: Markets Eye Canada’s Election But Bigger Moves May Follow US Trends

Although a Liberal majority is the expected outcome, markets are bracing for higher CAD volatility, particularly if the results defy projections. The future of Canada-US trade relations, fiscal discipline, and monetary policy are all at stake.

The 2025 Canadian federal election will be closely watched not just for its political drama, but for its potential to shape market direction, fiscal policy, and the Canadian dollar in the months ahead.

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