Mark Carney formally announced yesterday that he will run for Canada’s Liberal Party leadership to replace Justin Trudeau. The consensus appears to be that the leadership contest will be a close one between Carney and former finance minister Chrystia Freeland. Recent opinion polls show Carney has a small advantage over Freeland, while betting markets give him a 70-30 lead, ING's FX analyst Francesco Pesole notes.

Markets expect some support around 1.430 in USD/CAD

"In our view, Carney remains the more market-friendly alternative, considering Freeland’s conflicting terms with Trump on trade. That said, it is likely that the new Liberal leader will face a parliament no-confidence vote and the probability of elections before the October statutory deadline remains high. The Conservative party, led by Pierre Poilievre, holds a huge lead in the polls, so we believe Poilievre's plan for the US-Canada trade relationship may be more relevant for Canadian markets than that of the new Liberal leader."

"For now, the loonie remains in limbo. USD/CAD has been flat since the start of the year, and still embedding a 3% risk premium associated with the risk of Trump’s tariffs – according to our short-term fair value model. Even if unilateral 25% tariffs on Canada don’t materialize, smaller universal tariffs would still asymmetrically damage the economy of the main US trade partners. In 2023, exports to the US accounted for roughly 20% of Canadian GDP."

"To rebound at this stage, CAD requires more reports suggesting a lighter-touch approach by Trump on trade. Barring that, we expect the risk premium to linger and some support around 1.430 in USD/CAD."