David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
Recent tracking polls show the New Democrats at the front of the pack in the upcoming federal election. If voting were held today, that support might be sufficient to yield them a minority government. If the polls were to hold, there would be little doubt that the Liberals would support the NDP rather than vote with the Conservatives on any no-confidence motion.
Given the policy uncertainty that would unfold, both fiscal and monetary – remember that Bank of Canada Governor Stephen Poloz was hand-picked by Prime Minister Stephen Harper – it seems safe to say this would not be viewed as a loonie-friendly event.
The Conservatives are vulnerable on many fronts. There is the fatigue factor. There is the fact that we've now seen four straight months with the Canadian economy in at least a mild recession. And now, what looked like a budgetary surplus for 2015 has swung to a deficit, tarnishing the government's hard-fought reputation as solid fiscal managers.
Markets do indeed respond to the shifting political winds. One can go back to the federal election of October, 1993, when a decade of pro-business Conservative rule was replaced by the Jean Chrétien Liberals, who campaigned on an array of populist measures contained in the Red Book campaign document.
The day after that election, the Canadian dollar fell to 75.7 cents (U.S. dollar basis) from 76.4 cents and slid down to 72.4 cents over the next six months.
John Crow was out as the Bank of Canada governor within a few months, while the government's first budget was royally trashed in the markets and had to be redrafted.
Remember, the recession of the early 1990s was long over and the global economy was firming. Commodity prices were on an upward trajectory, and yet the shifting political backdrop took the Canadian dollar down four cents.
Alternatively, we can go back to when provincial New Democrats ruled 40 per cent of the country (including Ontario) from October, 1990, to June, 1995.
The outflow of capital was rather dramatic, and the Canadian dollar was crunched 20 per cent over that interval even though commodity prices rose by 12 per cent over that time. (This was before the federal Liberals' fiscal fight, which forced the Bank of Canada to ease policy dramatically and keep domestic interest rates below U.S. levels to depreciate the loonie in the second half of that decade.)
So you see, politics do matter for markets, and they should not be ignored.
This is not to knock the New Democrats at all – if the people speak, they speak. But while democracy rules, capital does flow to where it is treated best.
Few things respond to political swings as much as currencies, especially if they lead to 180-degree shifts, as from years of pro-market policies toward more deficit spending, more regulation and higher taxes.
There are plenty of reasons to be cautious on the Canadian dollar – soft commodity prices, weak manufacturing activity, near-record trade deficits and uber-easy monetary policy at a time when bond yields already trade a deep discount to treasuries. But a power shift in Ottawa would add to this list.
Polls are just polls. Heading into the 2011 election, there was a lot of concern that the Conservatives would win a weak minority and suffer the ignominy of facing a no-confidence vote in Parliament that would pave the way for a Liberal-NDP coalition – we know how well that forecast went.
Then again, real growth in the gross domestic product was 3 per cent that year, not zero. As Bill Clinton famously said on his way to toppling George H.W. Bush in the 1992 U.S. presidential campaign, "It's the economy, stupid!"
Editor's Note: The original print version of this column and an earlier digital version contained two paragraphs which included inaccurate information. Those paragraphs have been deleted in this digital version.
David Rosenberg