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Briefing highlights

  • Canadian dollar worth 10% more under Clinton
  • Clinton has economy on her side
  • All eyes on Apple's quarterly results
  • The loonie, Clinton and Trump

    The Canadian dollar would be worth 10 per cent more under a Clinton presidency than a Trump one, a new study suggests.

    But before you run out and buy loonies on what seems like a sure win by Hillary Clinton in the Nov. 8 U.S. presidential election, keep in mind that much of that gain is already priced into the currency.

    Still, the study published by the Brookings Institution highlights what could happen should Donald Trump pull off the seemingly impossible and actually win, one of its authors says.

    The study by University of Michigan professor Justin Wolfers and his Dartmouth College colleague Eric Zitzewitz looked at what played out in financial markets on the night of Sept. 26, when Ms. Clinton was deemed to have won the first presidential debate against Mr. Trump.

    Both the Canadian dollar and the Mexican peso, key currencies in this case because of Mr. Trump's trade stance, rose against the U.S. dollar that night.

    The peso, seen as a proxy for the Republican candidate's rise and fall, gained much more than the loonie. Mr. Trump has been aggressive in his rhetoric aimed at Mexico, but his vow to renegotiate or tear up the North America Free Trade Agreement would, of course, be a huge issue for Canada, as well.

    Thus, the moves in the currencies.

    I'm simplifying what went into this study – Professors Wolfers and Zitzewitz use complex formulas that include factors such as prediction markets and the “Trump discount” – but what's at stake is clear in the abstract of their paper.

    “Given that most financial markets are typically quiet during that time, movements in asset prices likely reflect market participants’ collective view of the impact of the 2016 election," they said, having studied stock prices and volatility, oil and currencies.

    “Given the magnitude of the price movements, we estimate that market participants believe that a Trump victory would reduce the value of the S&P 500, the U.K. and Asian stock markets by 10-15 per cent, would reduce the oil price by $4, would lead to a 25-per-cent decline in the Mexican peso, and would significantly increase expected future stock market volatility,” they added.

    “Market movements over the Oct. 7-9 weekend, during which a tape was released that prompted many Republicans to unendorse Trump, tell a largely consistent story. Clinton's probability of election rose, stocks rose, volatility fell, and the currencies of Mexico and Canada rose against the dollar.”

    They also looked at what happened to other currencies, but the debate-fuelled gains in the peso and loonie are important because Canada and Mexico are part of NAFTA.

    “Extrapolating, this suggests that the peso would be worth nearly 30 per cent more under a Clinton presidency, and the Canadian dollar would be worth 10 per cent more,” they said.

    Here's how Mr. Zitzewitz, an economics professor, explained it later: “The Canadian dollar increased by about 0.6 per cent during the first debate, which improved Clinton's probability of winning by 6 per cent. So that scales to implying that the Canadian dollar would be worth about 10 per cent more under Clinton than under Trump.”

    He figured that the odds of Ms. Clinton winning are already so high that up to 90 per cent of the added value she would give to the loonie is already priced in.

    “It's amazing how large the effects of a Trump presidency would be on Canada, given how small a part Canada has played in the stated rationale for Trump's policies,” he added.

    “I guess all wars have collateral damage – trade wars included, and unintended consequences can sometimes be bigger than intended.”

    There's much more than the election now affecting the loonie, which is at about 75 cents, notably oil prices and, particularly over the last few days, the dovish comments from Bank of Canada Governor Stephen Poloz as he and his colleagues held their key rate steady and released their Monetary Policy Report (MPR) last week.

    Bank of Nova Scotia, for example, still expects the currency to sink to possibly as low as 74 cents by late this year or early next.

    Which wouldn't trouble Mr. Poloz at all, given the added boost that could give to Canadian exports.

    “Given that the MPR spent a few pages highlighting Canada’s poor competitiveness, the BoC probably doesn’t mind the loonie’s turn lower,” said BMO Nesbitt Burns senior economist Benjamin Reitzes.

    “Indeed, it could take a much larger depreciation to sufficiently improve Canada’s competitiveness.”

    Clinton and the economy

    Ms. Clinton certainly still has the economy on her side, as this table by BMO senior economist Sal Guatieri shows.

    Region Jobless rate (% Sept. 2016) YoY change in jobless rate (ppts) RealClear Politics polls (pts)
    Florida 4.7 -0.4 C
    3.8
    Virginia 4.0 -0.2 C
    8.0
    Ohio 4.8 +0.2 T
    0.6
    N. Carolina 4.7 -0.1 C
    2.5
    Pennsylvania 5.7 +0.8 C
    6.2
    Iowa 4.2 +0.6 T
    3.7
    Georgia 5.1 -0.5 T
    4.0
    Arizona 5.5 -0.4 C
    1.3
    Wisconsin 4.1 -0.5 C
    7.0
    U.S. 5.0 -0.1 C
    5.8

    “Although the national unemployment rate is little changed in the past year, it has fallen materially in most battleground states,” Mr. Guatieri said.

    “That’s a plus for the incumbent party candidate, Hillary Clinton, who indeed leads in most of the heavily contested states,” he added.

    “Meantime, Donald Trump has the edge in two states (Ohio and Iowa) where joblessness has actually risen.”

    The exceptions, he said, are Georgia and Pennsylvania. Mr. Trump has the lead in the former, though the jobs market has improved. And Ms. Clinton leads in Pennsylvania, despite the uptick in unemployment.

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