09:02 AM EST, 11/11/2024 (MT Newswires) -- The degree to which United States incoming President Donald Trump's policies will impact Canada's economy will be a lingering question for months to come, said TD.

In the aftermath of the results, Canada's 10-year yield spiked nearly 20bps to over 3.40% but has fully retraced at the time of the bank's note. The Canadian dollar (CAD or loonie) finished flat on the week (0.719 cents) despite heightened volatility, while Canadian stocks caught a bid, rising 2.5%.

A big near-term question is how Trump's tariff policy will jolt US-Canadian trade relations, asked TD. In short, the existing USMCA trade agreement with the US and Mexico could keep Canada insulated from tariffs, so long as the country makes a handful of concessions come the pact's review in 2026.

That said, the bank doesn't discount the very real risk that Trump could move forward with tariffs on Canada, which would have immediate negative impacts on gross domestic product, inflation and trade.

Trump's presidency also puts the Canadian dollar on a different path. TD's forecast for higher US inflation will result in a slower pace of US rate cuts in 2025, widening the spread between the Bank of Canada and the Federal Reserve, and pressuring the loonie lower.

The Canadian dollar has already depreciated around 3% against the US dollar (USD) since early September and TD expects the CAD will bottom in Q1 2025 before modestly appreciating after. It wouldn't surprise the bank to see the CAD temporarily break below 70 cents in the near term.

Last Tuesday's election overshadowed some important domestic developments. For one, Canada's job market looks to be on solid footing. Canada's economy has added a respectable 270,''' jobs so far this year, 15,000 of which came in October.

Against this backdrop, TD is seeing unemployment topping out around current levels, as the federal government's plan to aggressively slow population growth should limit the buildup of further labor market slack. Meanwhile, wages continue to show signs of stickiness and a jump in hours worked suggests October GDP growth could print a solid number.

Elsewhere in the Canadian economy, housing markets may finally be responding to rate cuts, stated TD. Preliminary sales data for October are consistent with a hefty 8% increase in home sales based on double-digit surges in Toronto and Vancouver sales activity. With additional interest rate cuts on the way and new federal borrowing measures, more momentum is likely to build.

For now, the Bank of Canada's best approach would be to look through the near-term uncertainties when setting the policy rate, according to TD. It's still too early to have a high-conviction call for the Dec. 11 meeting given the deluge of data between now and then, but TD thinks that the BoC will revert back to a 25bps cut after opting for a 50bps jumbo move last month.