Home Trudeau takes the reins

Financial markets around the globe have effectively been range-bound overnight, with the macro-economic focus shifting away from the Federal Reserve to other central bank policy makers like the Bank of Canada and the European Central Bank, which both meet this week.   Asian trade was fairly subdued during the overnight session, though the Shanghai Composite did manage to reverse the losses sustained on Monday in the wake of the slightly softer than expected GDP figures out of China, rallying to finish the day up by 1.1%.   Commodity-linked currencies are managing to claw back some of Monday’s losses against the greenback, with the aussie and kiwi both eliciting bid tones in the wake of positive price action in front-month WTI.   S&P futures are telegraphing Tuesday’s open will be met with a red tape, though the magnitude of the losses are relatively light ahead of the opening bell and resemble range-bound trading rather than panicked selling.

The big North American news overnight was the outcome of the Canadian Federal Election, and the stunning majority victory secured by the Liberal Party, which ousted Stephen Harper as Prime Minister to pave the wave for Liberal leader Justin Trudeau to now take the reins.   Change was definitely on the minds of Canadians last night, as the Liberal party secured 184 seats of the 338 contested, also claiming just shy of 40% of the popular vote.   The reaction for the loonie was mixed after the results of the polls began rolling in, with Canadian dollar weakening slightly as it first became apparent the Conservatives were no longer going to be the ruling party of Canada, yet that early weakness has since faded in the wake of the Liberals securing a majority government as it removes some of the political risk premium usually associated with minority governments.   From an economic standpoint, the Conservative platform (who now make up the official opposition as they only were able to secure 99 seats) was seen as pro-business and fiscally conservative; however, there is not a drastic chasm between the Liberals and Conservatives economic policies.   The main difference is that instead of the Conservative promised balanced budget, the Liberals have promised to run a $10bn annual budget deficit for the first three years to invest in new infrastructure.   While deficit financing is traditionally seen as bad medicine when aimed at stimulating an anemic economy, with monetary policy’s diminishing marginal rates of return, and the fact it is honing in on its lower bound for Canada, the promise to loosen up the government’s purse strings is a good sign for the Canadian economy.   The challenge will be whether the new Trudeau leadership can navigate the tough economic landscape that faces Canada in the short-term, as many questions around his economic policies still remain; however, it was clear Canadians were no longer content with the “steady-as-she-goes” approach Stephen Harper and the Conservatives ran on, and it will be interesting to see how the new Liberal government tackles their review of the recently minted TPP deal.

On the spectrum of outcomes post-election, the removal of the fiscal conservatism with the Conservative Party to be replaced by a Liberal majority has been looked upon more favourably than an NDP minority government, and thus the loonie is responding accordingly.   The loonie is lagging its commodity-linked peers this morning, but it has still managed to stop yesterday’s tumble against its American counterpart ahead of Wholesale trade data for August later this morning, and the Bank of Canada decision tomorrow.   The recent commentary from Governor Poloz has suggested the bar for further easing from the BoC is rather high, and the mini easing cycle has completed its course for the time being.   The bank’s proactive nature to taking out insurance in the form of interest rate cuts is still filtering its way through the economy, and Poloz is likely content to continue to assess the impact of the easing measures taken earlier in the year.   While Poloz has remained upbeat in regards to green-shoots emerging for business investment and the non-energy export sector, these have yet to sustain much strength in the actual economic numbers, so releases later in the week when we get both Retail Sales and CPI could be more impactful for loonie traders.   The recent rally for the waterfowl relative to the greenback has been more of a function of USD weakness as opposed to Canadian dollar strength, so this week could be an inflection point to some extent; does the loonie revert back to trading on fundamentals which point to a struggling economy, or can Retail Sales and an optimistic central bank chief keep the spirits of loonie optimists high?

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Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.