Market News

BY Gigi Suhanic

A Canadian minority government could force the loonie down against its United States counterpart, according to one currency watcher.

“The risk of a minority government — which might force the victor to seek an alliance with the nominally separatist Bloc Québécois and generally complicate the business of government — may be understated,” Karl Schamotta, chief market strategist at Corpay Currency Research, said in a note on Monday. “A negative reaction could be seen in the Canadian dollar if neither party succeeds in securing a majority.”

The Canadian dollar was holding relatively steady Monday morning at 72 cents U.S., slightly off a multi-year closing high of 72.4 cents U.S. on April 22.

The loonie is up 4.8 per cent since the end of January, when it hit a closing low of 68.8 cents U.S., with the recent increase in its value attributable to investors fleeing the greenback for other havens due to the economic uncertainty brought on by U.S. President Donald Trump‘s fluctuating tariff policies.

Polls indicate the Liberal Party under Mark Carney is leading the Conservatives, led by Pierre Poilievre. But the Conservatives have tightened the gap over the last days of the election campaign.

The Liberals have 43 per cent of the vote compared with 39 per cent for the Conservatives, each with a margin of error of plus or minus four per cent, according to 338Canada, a poll aggregator.

Economists and currency watchers said markets expect the election result to have little impact on the Canadian dollar in the short term.

“External developments are likely to continue to be more important to the Canadian dollar than domestic politics, at least for a while,” Derek Holt, a vice-president and head of capital markets economics at Bank of Nova Scotia, said in a note.

He also attributed the U.S. dollar‘s slump against the loonie and other major currencies to rising bets that the U.S. Federal Reserve will wind up cutting interest rates more than expected.

Despite gaining against the U.S. dollar, Holt said the Canadian dollar has underperformed other currencies from late January to now.

But Schamotta said foreign exchange markets look “remarkably unworried” about the election result, noting that a measure tracking the cost to insure against a major currency slump has fallen to levels previously recorded following the pandemic after “declining sharply” in the last month.

“This seems well-justified, given the relatively centrist policy stances recently adopted by both major parties,” he said.

Noah Buffam, an associate at CIBC Capital Markets’ fixed income currency and commodity strategy, said “the market is correctly reading that there will be very little reaction” in Canadian-U.S. dollar markets, adding that the platforms of the Liberals and Conservatives appear to be more closely aligned in this election cycle.

If the Liberals win, CIBC Capital Markets is expecting the Canadian dollar to rally by only 10 basis points, given that the party’s platform results in higher deficits. A Conservative win could boost the Canadian dollar by 30 basis points due to its smaller deficit outlook, it said.

Bank of Montreal’s second-quarter estimate for the loonie is 71.3 cents U.S., Canadian Imperial Bank of Commerce has an estimate of 71 cents U.S., Bank of Nova Scotia’s estimate is 70 cents U.S., Royal Bank of Canada has an estimate of 69 cents and Toronto-Dominion Bank’s estimate is 67 cents U.S.