“This is not a time for austerity” rings loud in markets as loonie feels the consequences…
In last week’s edition of the Week Ahead, we referenced the risks yesterday’s resumption of Parliament and speech from the throne posed for the loonie. Yesterday’s throne speech saw these political and credit risks rise to the fore. In combination with the general risk-off tone in markets this week, the speech resulted in the loonie feeling the pressure, extending its slide back towards the 1.34 level – USDCAD is now trading 1.60% higher on the week.
The weight around the loonie’s neck is unlikely to be removed in the near-term as the latest fiscal pledges don’t point to a clear path to avoid an upcoming election, while questions still linger over Canada’s credit outlook and the government’s response to rising Covid cases domestically.
Yesterday afternoon, the Canadian government outlined its commitments to shelter the economy from the effects of the pandemic at a time when the domestic Covid case count is rising. Speaking on behalf of the government, Governor-General Julie Payette outlined the Trudeau administration’s ambitions to create 1 million new jobs, increase the supply of housing, extend the Canada Economic Wage Subsidy scheme from December to next summer, improve the Business Credit Availability programme, and invest in its environmental goals. This was just to name a few pledges outlined by the government to help the ailing economy get back on its feet, with additional spending pledges aimed at the healthcare sector in order to fight the incoming second wave.
The most notable assertion is that the list is long and isn’t likely to be cheap.
While this has repercussions for Canada’s creditworthiness and may potentially stoke bond markets back into action, it may not even be the end of the Federal government’s bill. With both the New Democratic Party and Bloc Quebecois making quick claim to the fact that Trudeau’s plans don’t effectively meet their requirements for support, mounting political pressure could result in the fiscal taps being loosened further for Trudeau to avoid an election. Should Trudeau have to dig deeper into the fiscus to find political support, the risk is then moved into the fiscal space where concerns over the government’s ballooning debt pile are plentiful. However, the level of political risk isn’t removed completely. Another vote of confidence will come in the form of the fall budget, where new Finance Minister Chrystia Freeland is expected to announce the cost these measures and their implications on the trajectory of the debt-to-GDP ratio. This will be of the largest concern for markets, with the rejection of the budget in the legislature increasing the level of political risk again, while its acceptance could lead to dramatic credit risks should fiscal anchors not be dropped alongside the cost of the stimulus measures.
The first vote of confidence in response to the throne speech could occur as early as next week. Parliament is set to begin 6 days of debate on the government’s pledges, but they don’t necessarily have to be done consecutively. In conjunction with leaders of the Conservatives and Bloc Quebecois testing positive for Covid-19, the timing of the vote is hard to pin down. In the interim, these risks will undoubtedly weigh on the loonie as markets also await the latest measures by the government to curb the speed of the Covid-19 resurgence in Canada. Last week, data from John Hopkins showed Canada recorded around 8,000 new cases, compared with around 5,100 the week prior. The graph below highlights the rate of expansion in Canada relative to that seen in Europe where additional lockdown measures are being implemented, suggesting Prime Minister Trudeau may begin to impose stricter measures should the outbreak not naturally subside.
The domestic outbreak in Canada follows a similar path to that in Europe, suggesting further lockdown measures may be on the horizon
USDCAD starts to feel the pain of the increased level of risk as the government throws austerity out of the window in the short-term
Author: Simon Harvey, FX Market Analyst