Justin Trudeau’s Victory Could Actually Be Bullish for Canadian Dollar in 2016
Socialist Justin Trudeau has won Canada’s 2015 election, but does that mean analysts should slash their CAD-USD exchange rate forecast for the new year? Not necessarily.
The results of the Canadian Elections 2015 are out and the reds have won the majority under the leadership of new Prime Minister-elect, Justin Trudeau. The Liberal Party has dethroned Conservative Party head Stephen Harper from his 10-year reign. While the Canadians are rejoicing in “red” this morning, the domestic markets and the lone are out from the “red” zone and up in the “green.”
The Loonie got badly battered over the past year, courtesy of declining oil prices—Canada’s top export. The resulting technical recession in the economy further depreciated the Canadian dollar against its American counterpart.
Canadian Dollar Forecast is Bullish in 2016
The Bank of Canada (BoC) has cut interest rates twice this year to boost the economy, but failed. The current low interest rates have only added more to consumer debt in the last one year, while Canadians have seen their incomes stay stagnant. The result? We are witnessing the Canadian private debt ratio making all-time highs, way surpassing consumer household’s disposable income.
The Canadian dollar, which was at par with the greenback only three years ago, has faced a perpetual decline ever since. The question now is whether the new leadership will be any better than the last one.
Chart Courtesy of StockCharts.com
As the Liberals take over the country’s helm of affairs, the political and economic climate in the north of the U.S. is poised to change. The new Premier-elect, Justin Trudeau, promises to raise government spending backed by higher taxation on the rich and tax cuts on the middle class. He has proposed to fund infrastructure spending with a deficit which effectively takes the burden of a future monetary easing off of BoC’s shoulders. With monetary easing out of the picture, at least in the medium term, the Loonie will find some strong ground.
Now, I hear you question how a fiscal stimulus as opposed to a monetary stimulus would be any different for the dollar since theoretically. Fiscal spending, too, results in weakened currency. But here, practice refutes theory. Historically, we’ve seen that after the Great Recession of 2008-2009, beyond which the country turned to a deficit, the Canadian dollar was actually strengthening against the greenback.
Besides, Trudeau’s $19.0 billion proposed budget deficit is peanuts compared to Canada’s $1.8 trillion economy. Further, Trudeau’s policies, if materialized, are expected to cover up for the deficit very soon as he moves to keep Canada out of international war zones and make the Canadian military more lean.
On the other end of the spectrum is the Fed’s plan to continue to keep interest rates low. The Fed has cited international headwinds as a reason for the postponement of rate hikes, which are showing no signs of improvement in the near term. The Fed is also expecting unemployment numbers to disappoint by the end of this year so the greenback will stay modest against its peers.
Additionally, the recent spike in oil prices is providing support to the Loonie. OPEC’s meeting on Wednesday will further make things clear for CAD’s future performance. But it’s certain that the OPEC members have a consensus to continue to push for higher prices by keeping supply low.
In a nutshell, the future is looking bright under the “libs,” both for Canada’s people and its currency.