Canadian Dollar Would Prefer a Harper Victory
The Canadian dollar (CAD) could suffer if the familiarity of PM Harper’s Conservative Party be swept away on the 19th of October argues a leading Canadian investment bank.
The 42nd Canadian General Election looms - voting is due to take place in mid-October and there are implications for the Canadian dollar.
One leading analyst has suggested currency markets may not have adequately factored in the risks posed to the domestic currency by the vote.
As we report here, the loonie has managed to show a degree of resilience to advances by G10 majors, even in an environment within which commodity currencies like the CAD tend to struggle.
But, BMO Capital have warned clients that this resillience cannot be counted on in with political risks set to grow.
BMO forecasters suggest the risks to the outlook are skewed to the downside:
"In addition to risk appetite and Fed expectations, CAD has another important element in its outlook. That element is the federal election on October 19th. The election is now inside the one-month hedging window, but we think there is still a substantial amount of event risk hedging that remains to be done," says Stephen Gallo at BMO Capital.
The investment bank's analysts expect election event-risk to keep USDCAD around 1.32 for the next month, even though the shift in the interest rate differential argues for USDCAD to be around 1.30.
In addition to event risk, the election may discourage investors, because it is likely to lead to a minority government that may not have the political ability to respond to shocks.
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"We don’t think that a victory of any particular party is worth more than 1-2% movement in USDCAD, but we believe markets would prefer the familiarity of PM Harper’s Conservative Party," says Gallo.
Looking past the "little bubble of CAD weakness" surrounding the election, Gallo says his team still have USDCAD at 1.35 for year-end due to Fed tightening.
"That outlook assumes that West Texas Intermediate crude oil remains in a $40-50 price range. If oil were to rise above that range and the Fed were to hike, we think USDCAD might only return to the year’s high of 1.33," says Gallo.
However, BMO Capital think it would take a trifecta of oil below $40, a BoC rate cut and a Fed hike to get USDCAD above 1.40. "We consider that scenario highly unlikely."
