The worst kept secret was finally confirmed over the weekend as Prime Minister Justin Trudeau met with Governor General Mary Simon to dissolve Parliament and set a snap election for September 20th. Trudeau’s plan is to compound a recent surge in polling for the Liberal’s and regain a parliamentary majority after 2019’s election disappointment.
However, despite the Liberal party’s popularity rising in polls due to substantial government transfers and effective rollout of vaccinations during the pandemic, question marks still sit over whether the rise in polling popularity will be enough for the government to receive the 170 seats needed to win an outright majority. Current polling suggests the Liberals are comfortably in poll position to win the most seats in the election, sitting at a 95.7% probability, however, it remains a coin flip as to whether they can transfer this win into an absolute majority.
Rise in USDCAD isn’t disconnected from broad USD move
The announcement of a firm election date over the weekend had a limited impact on financial markets this morning.
The loonie sits 0.3% lower against the dollar, although this is largely due to broad USD strength following a downturn in market risk sentiment after the weekend’s geopolitical events and a slip in Chinese economic activity data, while the TSX index follows US equities marginally lower upon cash open. Meanwhile, implied option volatility (the cost of buying call/ put options) also remains subdued for USDCAD relative to previous months over tenors that incorporate the election, although this is likely to change in the coming weeks.
2-month at the money implied volatility for USDCAD remains near recent lows despite now encompassing election risk
The reason for the limited reaction in financial markets is two-fold in our view. Firstly, the snap election has been on the horizon for market participants for some time, it was merely the actual timing of the election that was unknown. Secondly, given the nature of it being a snap election, competing parties are yet to release their latest election pledges. Without election manifestos outlining each party’s commitment to fiscal consolidation and correcting Canada’s productivity lull, the preliminary polling is somewhat less conclusive. In addition to this, investors are unable to begin pricing in their views on the elections outcomes and what this means for different assets.
While we expect market volatility to increase as manifestos are released and the polling becomes more accurate, for now, we don’t view the election as too destabilising for our August forecasts.
With both the national debates and the election itself pencilled in for September, our near-term forecasts next month will be more reflective of our base case election outcome. However, at the current point in time, we note that CAD volatility is likely to rise in the coming weeks and the financial market reaction to the election result is likely to be driven by whether PM Trudeau’s political gambit pays off or whether the Liberal’s fall short of the mark again.
Author: Simon Harvey, Senior FX Market Analyst