(22 October 2019 ) DAILY MARKET BRIEF 1：CAD flat following election results, yet high appreciation potential

Election results have left CAD traders unimpressed, although reelected PM Justin Trudeau should face a minority government that should force a coalition with New Democratic Party leftists. As risks of new general elections triggered by a vote of no confidence appears limited and the Bank of Canada is not expected to take additional easing steps for the time being, CAD should remain the best G10 currency this year, supported by positive effects by upcoming USMCA agreement ratification.

The final vote results project that PM Justin Trudeau’s Liberal Party should be granted a total of 156 out of 338 seats (184 seats achieved in October 2015 elections) in parliament while an absolute majority would have required 170 seats, paving the way towards stronger political entente looking forward. This is all the more the case for the United States – Mexico – Canada (USMCA) agreement that was already signed on 30 November 2018 and which still necessitates ratification by US and Canada lawmakers, suggesting that full application of the trade deal should not occur before early 2020. Whereas Mexican Parliament already gave their approval in June of this year, Trump’s impeachment process is expected to hamper the prospects for new trade deals while Trudeau’s Liberal Party should still receive support from opposition Conservative Party. With the USMCA in place, Canada should remain a major winner, and the Canadian economy should benefit in the long-term. In this backdrop, we should see the BoC maintaining its dovish stance and adopt a wait-and-see, data-dependent approach, considering downside risks on the global economy due to current trade developments. As inflation lies within range, labor data stays resilient and manufacturing activity improves, the BoC is not expected to move its Overnight Rate on 30 October 2019, untouched since October 2018 hike. Further CAD appreciation is definitely in the pipeline in particular when assuming a Fed rate cut at the FOMC meeting due the same day..

By Vincent Mivelaz