Canada’s Election to Foil FX Traders Hunting for Volatility
(Bloomberg) -- Elections often drive big swings in the foreign-exchange market, with the risk of radical change this year pushing down the Peruvian sol and the Chilean peso.
Not so for Canada.
There has been little-to-no premium priced into the Canadian dollar -- relative to the greenback -- due to the last five federal elections, Bipan Rai, the head of foreign-exchange strategy at CIBC, wrote in a note to clients. He said most movements in the Canadian dollar can be attributed to other factors -- such as oil prices, bond yields and the strength of the U.S. dollar -- and the elections on Sept. 20 are unlikely to be much different.
“This election is unlikely to mean much for the CAD. In fact, most election campaigns in Canada don’t really end moving the dial for the loonie at all,” Rai wrote. “The country’s risk/return profile is still far too attractive to foreign investors and this election won’t change any of that.”
Prime Minister Justin Trudeau is seeking to win re-election and gain more seats for his minority government in the parliamentary elections, campaigning on pledges to raise taxes on banks and crack down on housing speculators. Polling suggests neither of the main parties has much chance of winning an outright majority in the House of Commons.
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Yet investors are still pricing in a small amount of uncertainty. Three-week implied volatility in the loonie-U.S. dollar exchange rate, a tenor that extends two days past the vote, is priced at 7.2%, or 0.3% percentage points higher than the three-month volatility of 6.9%.
Expectations of an expansive U.S. infrastructure spending program helped drive the Canadian currency to six year highs in early June, but the loonie has experienced notable bouts of weakness since. Even so, it remains the best-returning Group-of-10 currency of 2021.
Shaun Osborne, chief FX strategist at Scotiabank, said foreign investors tend to expect more currency impact from elections than the nation’s history would suggest.
“Historically, at least in terms of economic policy, there’s very little difference between left and right in Canada,” Osborne said. “When you look historically at the CAD’s performance, it generally breezes through elections fairly serenely.”
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