Canadian dollar’s rally shows Justin Trudeau seen as no bogeyman

The Canadian dollar’s slide came to a halt amid speculation the country can cope with the extra spending that may result from Justin Trudeau’s election victory.

The loonie rebounded after dropping to the lowest level in a week against its U.S. counterpart as Trudeau’s Liberal Party put an end to Conservative Prime Minister Stephen Harper’s decade-long rule by winning a surprise majority. The country’s new leader campaigned on a plan that included running C$25 billion ($19 billion) in deficits over three years to stimulate the economy with infrastructure spending, while increasing taxes on top earners and cutting them for the middle class.

“It was a little bit premature to say this was really that negative for the Canadian dollar,” said Thu Lan Nguyen,   a strategist at Commerzbank AG in Frankfurt. “The market was caught on the wrong foot, and there was a bit of an overreaction.”

Canada’s dollar strengthened 0.1 per cent to 76.88 US cents as of 6:30 a.m. New York time, having slipped to 76.64, the weakest level since Oct. 13.

Looser Policy

Trudeau’s victory came as the collapse in the price of crude oil, Canada’s main export, tipped the country into a so- called technical recession in the first half, forcing its central bank to twice cut interest rates to stimulate the economy. The loonie slumped to its weakest level in more than a decade in September, while bond yields dropped to a record earlier in the year.

The Bank of Canada will keep its benchmark interest rate at 0.5 per cent on Wednesday, when it also releases its quarterly economic outlook, according to the median of prediction of economists in a Bloomberg survey. The loonie will weaken to 74.6 US cents by year-end, before rebounding to 75.7 by the end of 2016, strategists predict.

A more expansionary fiscal policy may eventually support the currency by reducing the likelihood of further rate cuts, according to Royal Bank of Canada.

“We doubt that the election outcome will be a durable source” of weakness for the Canadian dollar, Adam Cole, London-based head of global foreign-exchange strategy at RBC, wrote in a client note. “Canada’s public finances are sound enough to withstand a moderate fiscal loosening without any threat to credibility and, all other things equal, the medium-term risk of lower rates diminishes as the fiscal stance loosens.”

© Bloomberg News