Market Participants May Want to Look Past Canada's Election Outcome

Canada's national election is Monday.  The latest opinion forms show a virtual dead warmth between the governing Conservatives and Liberals.

Two main issues dominate.  The first is the economy.  Canada is struggling.  Although the contraction period has ended, growth is fragile.  The actual economy contracted for the very first five months of the year.  Joblessness has steadily risen in the last year.  Last month it was at 7.1%, which matches the greatest level since the end of 2013.  It was 6.6% within January. 

The Bank of North america has cut rates twice this year in response to the discouraging economic activity.  The Canadian economic climate was levered on high commodity prices.  This produced what is known the Dutch disease.  During the commodity boom, the currency appreciated dramatically and this squashed the non-energy sector, where the majority of the population lives (Ontario as well as Quebec). 

The second issue that are rivaling the economy is immigration.  Specifically it is about integrating immigrants.  It is about the extent that immigrants about able to preserve their traditional culture.  It’s head coverings of women is actually center of the controversy.  Ironically, it is not just the political rhetoric about immigrants, but that closeness of the contest may make the immigrant vote a decisive.  There are several voting districts around Toronto in which 40-50% of the voters are relatively new immigration.

Although we had thought the Canadian dollar would be impacted by the actual political uncertainty surrounding the election, the focus is elsewhere.  Many traders emphasize oil costs.  Simply looking at directional correlation, oil and the Canadian dollar have moved in the same direction 94 of the past 100 sessions.  Correlation of results (percentage change) is about Zero.57 over the past 60 sessions.  It has been flat, around presently there since late-May.

The two-year interest rate differential also is a element.  The Canadian dollar moves in the same direction because the US Canadian interest rate differential 72 times in the last 100 sessions.  It was above 90 within August and the first half of September.

Another driver is the common risk environment.  Here we use the S&P 500 as the proxy.  The Canadian dollar typically moves in the same direction as the S&P 500.  Over the past 100 sessions, they have moved in the same direct 69 times.  This is the highest for the year.  When we correlate the returns, we find a nearly 0.78 correlation in the last 60 sessions, which is also close to the highest since July 2014. 

The electoral outcome may pose some heading risk, but market individuals may be better served by concentrating on the drivers of the Canada dollar:  oil, interest rate differentials, and the general risk environment.

Canada Would go to the Polls on Monday October 19 is republished with permission from Marc to Market