06:38 AM EDT, 04/29/2025 (MT Newswires) -- Canadian Prime Minister Mark Carney's handling of the trade war with the United States at the start of President Donald Trump's second term played an important role in the Liberal Party's victory in Monday's election, wrote Mitsubishi UFG.

The victory concludes a sharp turn around in fortunes for the Liberal Party, which were well behind in the polls when former Prime Minister Justin Trudeau resigned, the bank in a note to clients. However, the margin of victory appears to be narrower than indicated by the final polls. According to reports, the Liberal Party won about 43% of the national vote and may fall short of the 172 seats needed for a majority in the House of Commons which would require the new government to work with other parties to pass budgets and together legislation.

The Canadian dollar initially strengthened after it was announced that the Liberal Party had won resulting in USD/CAD falling to a low overnight Monday of 1.3809 but the pair has since risen back to up towards 1.3870 as it became clear that the Liberals may not win a majority, added the bank.

Prime Minister Carney has said that if he won re-election, he would seek talks with President Trump that are comprehensive, ambitious, and respect Canada's sovereignty with the USMCA trade deal scheduled to be reviewed in July of next year.

The Canadian dollar has already staged a strong rebound over the past month after Canada, alongside Mexico, was hit less than feared by President Trump's so-called "Liberation Day" tariff plans and the US dollar weakened more broadly resulting in USD/CAD dropping back towards the 1.3800 level from closer to the 1.4400 level, pointed out the bank.

MUFG is still wary of the risk that Canada's economy could slow more sharply in response to trade disruption and policy uncertainty requiring the Bank of Canada to cut rates deeper so it isn't yet convinced that recent strong gains for the Canadian dollar are built on strong foundations.

The Liberals have pledged though to loosen fiscal policy to increase defense spending and cut taxes to provide more support for growth.