All the unpredictability could present a buying opportunity after the loonie’s nearly 30-per-cent decline over the past three years.MARK BLINCH/Reuters
As if the plunge in oil prices wasn't enough, currency traders are now wringing their hands over the prospect of political paralysis in Canada following this month's elections.
Even with Canada's dollar tumbling Tuesday to an 11-year low against its U.S. counterpart, the cost of options contracts protecting against further weakness has almost doubled in the past two months. As the Oct. 19 election looms, the front-runner, Conservative Leader Stephen Harper, has failed to win the support of the other parties he'd need to form a government. That's weighing on an exchange rate already sapped by the halving of crude prices in the past year.
"Everybody with exposure to the Canadian dollar is looking to hedge it until at least a couple weeks after the election," said Greg Anderson, the global head of foreign-exchange strategy at the Bank of Montreal, Canada's fourth-largest bank. "They're worried about an unclear outcome. They're worried about a minority government that can't fix any problems."
The first major challenge for a new government will be to address sluggish growth after China's slowdown roiled global markets and depressed the price of the commodities Canada depends on for just over half its exports. A prolonged political stalemate may delay efforts to aid the economy while leaving it unclear what policies a new administration might pursue. Canada's economy expanded by 0.3 per cent in July, a second month of growth after five months of contraction to begin the year, a report showed Wednesday.
The loonie is the second-worst performing Group-of-10 currency this month.
Canada's Challenges
"Investors don't like uncertainty, and that may be more the case now given some of the challenges Canada is facing," said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia. "Investors will prefer a clean win one way or the other, and a government that can get down to work and get the economy moving again."
Polls have shown Mr. Harper's Conservative Party is on track to win the most seats in Parliament but not a majority. With his two major challengers pledging not to support his government, it sets up a standoff after election day with few firm rules on how quickly things will settle.
Buying Opportunity
The lower dollar is being affected by "political uncertainty" around the election, Warren Lovely, managing director at National Bank of Canada, said at a Bloomberg fixed-income conference in New York on Wednesday. The weakened loonie is helping exporters and needs to stay low for longer, he said.
Whichever party wins the election should consider more spending to stimulate growth, he said.
Any kind of coalition government is complicated by divergent and incompatible policies being proposed by the three main parties: low taxes and balanced budgets from the Conservatives, balanced budgets but higher taxes to fund social spending from the New Democratic Party, and deficit-financed stimulus spending from the Liberals.
Even if a minority government does form, such parliaments typically don't last long. Canadian elections in 2004, 2006 and 2008 all produced minority parliaments that lasted, on average, 722 days, or just under two years.
Some investors see a silver lining. All the unpredictability presents a buying opportunity after the loonie's nearly 30-per-cent decline in the past three years, according to Axel Merk, head of Merk Investments LLC in New York. "As reality kicks in, they realize not all that much is going to change," he said. "It's time to pay attention to the loonie again on the positive side."