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.
More easing form CBRT to come
Looking through the smoke and short-term hype one can see that the pieces in the “great game” are moving. Turkey’s incursion into Syria has accomplished key objectives. Turkey has successfully removed Kurdish forces from 32km area of northern Syria and testing NATOS determination. In Geopolitics terms, President Erdoğan easily won that round. TRY assets gained on the successful execution of intentions. Images of the US military abandoning their Kurdish allies will not be easily forgotten by America’s global partners, highlighting the reality of alliances in the Trump era. It is clear to everyone that US sanctions will not affect reigning in President Erdoğan regional ambitions. Not even waiting until the smoke cleared did Erdoğan play his next hand, announcing intentions to become a nuclear power. With new allies like Russia, going nuclear will not be difficult. The nuclear card will hold the West hostage in future interventions.
The Central Bank of the Republic of Turkey will meet this Thursday, 24th October. Markets expect policy markets to cut the benchmark one-week repo rate by 150bp bringing it to 15.0%. Governor Uysal has no issues easing policy as this 150bp cut will be added to 750bp of cuts already in the prior two meetings. The central banks are taking advantage of the TRY goodwill post-cease-fire agreements to support Turkey’s weak economy.