Canadian Dollar CAD Predicted to Soften against the Pound ahead of BOC Rate Decision

October 21, 2015 - Written by John Cameron

STORY LINK Canadian Dollar CAD Predicted to Soften against the Pound ahead of BOC Rate Decision

Canadian Political Shift to Provoke Canadian Dollar Uptrend versus the British Pound

The Pound Sterling (currency : GBP) has seen significant price action against the Canadian Dollar (currency : CAD) during early trading this week thanks to a significant political shift in Canada.

Yesterday morning’s news that the Liberal Party had registered a shock Canadian general election victory, at the expense of the incumbent Conservative administration of Stephen Harper, initially caused the Loonie to ship support, sending the GBP CAD exchange rate Northwards to 2.0197 - its highest level since the final day of last month.

The move against CAD-denominated assets was driven by concerns over Liberal leader Justin Trudeau’s expansionary fiscal policy which jettisons the erstwhile Conservative administration’s ‘sound money’ approach. Going against the grain of other developed economies, Trudeau promised to run a CAD10bn annual budget deficit for the next three years, with the additional government funding which this frees up being used to pay for local infrastructure products in an effort to jump-start Canada’s flagging economy.

GBP/CAD Exchange Rate Held Above Two to One Threshold Yesterday

Investors had recovered their nerve and proved more willing to hold Loonie-denominated assets as yesterday’s session wore on and by the early stages of the North American trading day, GBP CAD had pared its early gains and was holding at just above the two to one threshold.

The decision from Canada’s electorate to ditch prudent fiscal stewardship in favour of a bout of Keynesian style pump-priming is redolent of the decisions taken by policymakers following the Great Crash of 1929. Initially global governments slashed spending and increased taxation in a desperate effort to balance their books, but the world economy only began to emerge from its funk when aggregate spending increased.

Commodity-Correlated Assets to Appreciate on Canadian Government Spending

In the US, this loosening of fiscal policy was encapsulated by the ‘New Deal’ policy of spending on large scale projects followed by President Franklin D. Roosevelt in his first term (1933-37). Other governments followed Roosevelt’s lead and the global economy healed. If Monday’s decision by the people of Canada marks the beginning of a similar burst of governmental spending then analysts forecast that the beneficiaries in the global FX markets are likely to be the high-yielding Australian Dollar (currency : AUD), New Zealand Dollar (currency : NZD) and Canadian Dollar (currency : CAD).

CAD UPDATE

Despite the fact that the Bank of Canada (BOC) opted to hold the cash rate at 0.5% the Canadian Dollar softened versus most of its major peers on Wednesday. This was due in part to policymakers expecting future policy easing with oil prices so low, but also in response to a drop in oil prices amid rising stocks and damp demand.

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