THE Canadian dollar climbed yesterday as Canada’s Conservative party won an outright majority in the general election. Since 2006, Prime Minister Stephen Harper has led two minority Conservative governments, but yesterday’s victory brings him a majority mandate.
Michael Gregory, senior economist for the Bank of Montreal, is buoyant about the result: “This is certainly a Canadian dollar friendly result. The Conservative government has followed plans that are very favourable to foreign investors by cutting spending in a policy of deficit reduction as well as implementing low corporate taxes.”
Alongside the gains for the Conservative party, the left wing National Democratic Party (NDP) also had its best ever election results, taking more than 100 seats. It managed this rise by snatching seats previously held by the Bloc Quebecois separatist party that has had a political stronghold in the Francophone Quebec province for more than two decades.
The hit taken by the separatist party, which saw its seats reduced to the point that it is no longer recognised as an official political party in the Canadian Parliament, is seen as another positive result by Michael Gregory: “On the fringes, the Bloc Quebecois getting trounced reduced a risk of Quebec sovereignty, which is always an issue hovering around elections. For them to be squeezed so much offers more stability.”
After the rally by the Canadian dollar yesterday, it is expected that the Loonie will continue to see gains. Markets had seen heavy selling of the Canadian dollar, fearful of the prospect of an unstable minority government led by a left-wing party. But the victory for Stephen Harper’s party, one committed to deficit reduction through a tight hold on public spending, is seen as a good result for the Canadian economy.
“They are deemed to be the favoured party for the markets and it is expected that the Canadian dollar will continue to benefit as a result,” says Richard Wiltshire, chief foreign exchange dealer for ETX Capital. He says the Canadian dollar has strengthened against the dollar over the last few weeks. But as the Loonie nickname suggests, trading the Canadian dollar is not for the faint hearted and there have been some nasty spikes along the way, most notably on 18 April when a lot of people were caught short.
In the short term, how should investors profit from the Canadian dollar’s anticipated direction? According to Richard Wilshire: “Selling dollar-Canadian dollar rallies has been the winning strategy for the last two weeks. I expect that the dollar-Canadian dollar will continue to trade on the soft side, but with a bit more caution than usual as the market worries about a possible pull back.”
With the weak UK PMI data that came in yesterday, traders should also keep their eyes on the sterling-Canadian dollar pairing, as there could be opportunity for short selling of this pair in the coming days.
Canada emerged from the recession in one of the strongest positions of the G7. If it can continue to rein in its public spending, then in the long term things look rosy for the Canadian economy.