Canada turns Liberal red (ink) 20Oct15

Canada turns Liberal red (ink)

Michael O’Neill

FX Consultant / IFXA Ltd


  • USDCAD dips on small oil gains
  • Bank of Canada rate meeting and monetary policy report due Wednesday
  • A light-weight joins the G-7 club

Canada’s new leader, Justin Trudeau, whose Liberal Party won a majority in Monday’s federal election to oust the Conservative PM Stephen Harper. Photo: Liberal Party of Canada

By Michael O’Neill

The longest Canadian election campaign in modern history is over and with it the nine-year reign of Prime Minister Stephen Harper. Justin Trudeau and his Liberal Party sprang from 34 seats in 2011 to a majority of 184 seats last night and will form a new government.

The Liberals ran on a tax-and-spend platform, promising to spend $20 billion over 20 years to curb greenhouse gas emissions and use another $2.0 billion to fund carbon reduction projects. They plan to run a $10 billion budget deficit for three years to finance $60 billion in new spending on roads, bridges, transit and other projects. The Liberals also pandered to the “middle-class”, a demographic that Trudeau was unable to quantify, by lowering taxes (1.5%) on incomes between $44,000 and $89,000 while raising taxes (4%) on incomes above $200,000.

Justin and the G-7

As the newly elected prime minister of Canada, Trudeau gets a seat at the G-7 table.

The president of the United States is a Harvard Law graduate, Angela Merkel has a doctorate in quantum chemistry, David Cameron graduated from Oxford, Francois Hollande is a graduate of HEC and also has a law degree, Matteo Renzi is a lawyer, and Shinto Abe has a political science degree. Trudeau is a drama teacher.

His acting talents will be on full display in the next few months, with a G-20 summit, an APEC summit and the Trans-Pacific Partnership Agreement all needing his attention and comprehension. Will he be able to convince world leaders that he has a clue?

USDCAD outlook

For the time being, the election outcome will have little to zero impact on the Canadian dollar. Rome wasn’t built in a day, and Canada’s domestic economy won’t be destroyed in a day either. In fact, there is a school of thought that suggests the news of infrastructure spending may provide some support to the loonie due to reduced risk of a Bank of Canada rate cut.

The BoC meets tomorrow on interest rates and will also issue its monetary policy report. No one expects any movement on rates, but there is an expectation that the MPR could be “dovish” if growth forecasts are lowered. That is a likely outcome since oil prices are sharply lower than they were when the last MPR was issued and worries about China’s growth have increased.

Retail sales and CPI data will be released on Friday. Retail sales are expected to be slightly softer and CPI unchanged. Neither data release should have much of an influence on Canadian dollar prices.

The reality is that USDCAD is tracking US dollar sentiment and oil prices. Domestic issues are mostly being ignored.

USDCAD technical outlook

Intraday: The intraday technicals are bearish and in a steep decline while USDCAD trades below 1.2990, looking for a break of the five-day uptrend line, currently at 1.2950 to extend losses to 1.2900. A move above 1.3000 would re-target resistance in the 1.3050-70 zone.

Short term: The near-term technicals are bearish while trading below 1.3050, looking for a break of the minor 23.6% Fibonacci level of the September 29-October 15 range to extend down to the October low of 1.2830. There is support, however, at 1.2923 (100-day moving average) and 1.2900 guarding the low. A break above 1.3080 would negate the downward pressure and target 1.3220.
Longer term: The USDCAD uptrend from the May 2015 low remains intact while trading above the 1.2810-30 area. If this level breaks, it would target the 200-day moving average (1.2657). Only a move above 1.3080 negates the downward pressure.

USDCAD daily with moving averages noted

Source: Saxo Bank

O Canada! Jasper Wilderness. Photo: iStock

— Edited by John Acher

Michael O’Neill is an FX consultant at IFXA Ltd

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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