- Government bonds gain, currency falls against most major peers
- Liberals ran on plan to use deficits to stimulate economy
The Canadian dollar headed for its biggest three-day slide as Justin Trudeau’s Liberal Party won a majority government in Monday’s national election on plans for additional deficit spending.
The currency weakened versus 15 of 16 major peers after the Liberals swept to power in the biggest political rebound in Canadian history. Most polls had predicted Trudeau would only win enough seats to be able to rule as part of a minority government.
Trudeau, who put an end to Conservative Prime Minister Stephen Harper’s decade-long rule, campaigned on a plan that included running C$25 billion ($19 billion) in deficits over three years to stimulate the economy with infrastructure spending, while increasing taxes on top earners and cutting them for the middle class.
“Investors are somewhat cautious about the change in government,” Bipan Rai, director of foreign-exchange strategy at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said by phone from Toronto. “It might be due to some uncertainty about how the fiscal picture is going to look.”
The loonie, as the Canadian dollar is known for the image of aquatic bird on the C$1 coin, fell 0.2 percent to C$1.3040 per U.S. dollar at 6:56 a.m. in London. It has dropped 1.3 percent since Oct. 15, heading for its steepest such drop since the period ended Aug. 25. One loonie buys 77 U.S. cents.
The collapse in the price of crude oil, one of Canada’s largest exports, tipped the country into a so-called technical recession in the first half of this year, forcing its central bank to twice cut interest rates to stimulate the economy. The loonie fell to its lowest in more than a decade, while bond yields dropped to a record.
In recent weeks, signs of stabilization in the price of oil and better economic data at home have lifted the loonie, helping it touch the strongest in three months on Oct. 15, and paring its losses for the year against the greenback to 11 percent.
With 86 percent of polls reporting, the Liberals were elected or leading in 184 of the 338 seats in the House of Commons, with the Conservatives on pace to take 102 and the New Democratic Party 41, according to preliminary results from Elections Canada. Every opinion poll in recent days had indicated the Liberals held a firm lead in the race, and were on course for at least a minority victory.
“Obviously governing is a little different than campaigning so the market will tend to be a little cautious on this front,” said David Tulk, chief Canada macro strategist at Toronto Dominion Bank. One could expect “to see a little bit more Canadian dollar weakness.”
The benchmark 10-year government bond, a traditional refuge for skittish investors, gained 12 cents to C$107.12, pushing the security’s yield down one basis point to 1.46 percent.
The Bank of Canada will review its benchmark interest rate, now at 0.5 percent, on Wednesday, when it also releases its quarterly economic outlook. The additional fiscal stimulus under the Liberal plan could ease pressure on the central bank for an additional rate cut, Avery Shenfeld, chief economist at CIBC World Markets, wrote in a note to investors.
“A decision to add a modest dose of fiscal stimulus reduces the need for an additional rate cut from the Bank of Canada, and could therefore push up short rates slightly given that they price in some odds of such a cut,” according to Shenfeld. “That could in turn be a bit supportive for the Canadian dollar.”
The median estimates among forecasters calls for the loonie to fall to C$1.34 per U.S. dollar by year-end, before rebounding to C$1.32 in 2016. The currency could strengthen if Trudeau’s planned stimulus delivers economic growth, said Karl Schamotta, director of foreign-exchange research and strategy at Cambridge Global Payments.
“If you do see some stimulus happening here in Canada via deficits you could see the Canadian dollar lift further on,” he said by phone from Toronto. “For today it’s somewhat negative for the Canadian fiscal balance but going forward it also has positive effects for the economy overall.”