As Liberals Win, Will Loonie Lose?

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Market Drivers October 20, 2015

Trudeau wins – USDCAD rallies but off highs
RBA Minutes suggest that rates stay stationary for now
Nikkei 0.42% Europe -0.59%
Oil $46/bbl
Gold $1173/oz

Europe and Asia:
AUD RBA minutes reveal that it remains neutral
EUR PPI -0.4% vs-0.1%
EUR Current Account 17.7B vs. 20.1B

North America:
CAD Wholesale Sales 8:30

USD Building Permits/Starts 8:30 AM

The biggest news in the overnight trade was the sweeping win of the Liberal party in Canada which moved the country markedly to the left after ten year of conservative rule. Led by Justin Trudeau, the son of former Prime Minister Pierre Trudeau.

The party coasted to the a surprisingly large win capturing 184 seats out of 170 needed to have a majority. In his victory speech Mr. Trudeau stayed clear of specific policy choices, but he ran on a clear expansionary fiscal platform and it will be interesting to see how me plans implement it amidst very challenging conditions for the Canadian economy.

It’s no surprise that the conservative leader Mr. Harper lost the Prime Ministership after a decade of rule as the collapse of oil prices has had a major contractionary impact on the Canadian economy. Mr. Harper rode the oil boom for many years, but now Mr. Trudeau faces a much greater challenge of reviving the resource driven Canadian economy during what is likely to be a prolonged slump in oil prices.

One of Mr. Trudeau’s more controversial proposals is to run three years of deficits that would help to pay for infrastructure spending, although he has vowed to keep them below the 10 Billion threshold. Mr. Trudeau has vowed to balance the budget by 2019. It will be interesting to see how Mr. Trudeau manages to finance his proposals, although borrowing funds should be considerably easier in the current environment of low rates. One possible obstacle to his plans would be an early rate hike by the Fed that could put upward pressure on rates for the whole North American complex and make borrowing for the new government more expensive.

Another possible problem for Mr. Trudeau’s platform would be further declines in oil prices which would sharply decrease Canadian income and almost certainly widen the deficits beyond his intended targets.

In short Mr. Trudeau would need a near goldilocks economy with oil remaining steady near the $50/bbl rate while US rates remain stationary for at least another quarter or two. Even under those conditions it is difficult to imagine who loonie could keep its bid as investors no doubt remain cautious given the leftward lurch by the Liberals. It is not unreasonable therefore to imagine that USD/CAD could test fresh multi-year highs at 1.3500 over the next few months as currency traders adjust to the transition in power. Only a sharp rally in crude could offset those capital flows and keep USD/CAD in the 1.2000-1.3000 range.

In today’s calendar the market will get a look at the Canadian Wholesale sales numbers which are expected to rise by 0.2% from the month prior and could provide a mild lift for the loonie if they meet their mark. The pair traded to a high of 1.3047 in the aftermath of the Liberals win, but has since settled near the 1.3000 figure. Still if the data misses, the combination of weak economic results and the strong political move to the left could put additional pressure on the cross and send it to a test of 1.3100 as the day proceeds.

Boris Schlossberg
Managing Director

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