Canadian and US Politics

As we are all aware, there will likely be a Canadian Federal election held this spring. With Justin Trudeau stepping down, and the Conservatives expected to win a majority government, we anticipate quite a few changes in the second half of 2025. One item we expect to change is the proposed capitals gains tax increase – which has not yet been passed into law.  The Conservatives have stated they will not support the capital gains tax increase. Another area of importance is Canada’s relationship with the US. Trudeau is disliked by Trump, so his exit may help improve relations with the US – notably with regards to the proposed tariffs. More on this below.

When President Trump takes office on January 20th, we expect many changes to the political landscape – both domestically and globally. While Trump is unpredictable, he has several well-regarded people supporting him.  One of these team members is Scott Bessent, the incoming Secretary Treasurer. Scott is seen by many in the financial markets as the ‘adult in the room’. Trump will likely pare back regulation on many industries – which will be helpful for businesses, including banks. However, the Republicans only have a one seat majority in the House, meaning he will have difficulty passing all the legislation that he campaigned on.

Interest Rates & Currency

Over the past year, there has been a growing divergence between the Canadian and US interest rate policy. The US economy continues to impress while the Canadian economy has been lagging. Looking ahead, reduced immigration into Canada and the potential for 25% tariffs on goods heading into the US, means that interest rates will likely diverge further in 2025. Currently, the markets expect the Bank of Canada rate to be below 3% by the end of the year – whereas US overnight interest rate (set by the Federal Reserve) is expected to be above 4%. Historically, Canadian and US interest rates have been in line with each other.

Diverging interest rate policy has had a large impact on the Canadian dollar. As many Canadians who have recently visited the US know, the Canadian dollar is at its weakest point since the beginning of the covid pandemic. While this makes buying anything from the US more expensive, the stronger US dollar has helped investment returns – as many of the investments our clients own are priced in US dollars. Of course, it would have the opposite effect if the US dollar were to weaken. Of note, it is not just the Canadian dollar that has weakened relative to the US dollar. Notably, the Euro, Japanese Yen and most other major currencies dropped significantly over the past few months.

Tariffs

Over the next few weeks, we will likely learn about the tariffs the US will be applying to imported goods. Canada, Mexico and China all export approximately $400 billion annually to the US. Notably, China has the largest trade surplus with the US. Canada’s two largest exports to the US are energy and cars & trucks. US oil refineries need Canadian oil – not the light crude that the US produces in surplus. If Canada and Mexico have the 25% tariff applied, we expect the cost of new cars in the US to increase significantly. Undoubtedly, the tariffs would be inflationary (ie lead to higher prices) for US consumers. If US inflation were to increase, it would put upward pressure on bond yields, likely leading to higher mortgage rates for Americans and potentially a weaker stock market (which Trump does not want). While we do not expect the full 25% tariff to be applied to all Canadian & Mexican goods, we do expect that some tariffs will be applied.

Fires in California

As we write this, the fires in the LA area are currently not under control. We pray for the fires to be extinguished quickly and that everyone in the area remains safe.

Pearlstein Wealth Update

We are excited to announce the newest member of our team, Prerana (pronounced Pray-na) Achara, will be starting later this month! We know that Prerana is looking forward to meeting many of you over the coming months. Welcome, Prerana!

Wishing everyone a happy and healthy 2025!

Pearlstein Wealth