Recent Canadian political developments are not as negative for the Canadian dollar as they might appear, according to T.J. Marta, senior currency strategist at RBC Dominion Securities Inc.
“Despite the sudden likelihood of an immediate election, the effect of the increased political risk . . . is offset by the likelihood of a very stimulative budget in the wake of an impressive economic platform from the Liberals in the guise of their economic and fiscal update Monday,” he said in a currency comment Wednesday.
“Regardless of the election timing or its results, the economic update showed that the new government will likely have $11.1-billion in surplus for 2005-2006, and with the Liberals now promising the types of large tax cuts the Conservatives have recently pushed for, it is apparent that tax cuts are on the way, which should be bullish for the Canadian economy at a time when domestic demand may be moderating,” he added.
Thus, the political risk may have only a muted effect on the currency, he said.
Political risk can create uncertainty for the Canadian dollar and thus is usually seen as a negative while a healthy economy is usually regarded as a positive.
Mr. Marta expects weather-related movements in energy prices and the pending inflow of funds related to mergers and acquisitions to have bigger impact on the exchange rate than the political situation in coming weeks.
Mr. Marta sees the loonie currently as being trapped in a trading range between 83 cents (U.S.) and 86.2 cents, and said that a move towards the bottom of the range would provide an opportunity to sell the greenback and buy the loonie on the spot market, which they did Wednesday morning.
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