At around 7:30 pm eastern time yesterday, Finance Minister Bill Morneau held a press conference in Ottawa to announce his resignation from Trudeau’s cabinet and his position as a member of parliament.
Morneau stated that he wasn’t asked by the Prime Minister to resign, but instead tendered his resignation as he no longer believed he was the appropriate person for the role. He will instead make a bid for the position of secretary general of the OECD.
Job rotation within cabinets tend to occur frequently, but despite this, they tend to inject volatility in the respective currency due to the heightened level of political uncertainty.
This is especially the case with the resignation occurring in such a pivotal position during Canada’s most severe economic shock in decades, where fiscal policy is expected to drive the recovery.
However, the loonie barely flinched at the announcement and, in fact, extended its rally against the dollar to touch highs not seen since January. We expect the rationale behind this is two-fold.
Firstly, since last weekend, speculation over Morneau’s departure has been rife. This is not only due to the WE scandal but also reported disagreements with the Prime Minister over the shape of the stimulus package. Given these reports and the current investigation into both Morneau and Trudeau due to the WE scandal, news of last night’s resignation is unlikely to have shocked many. Secondly, news that former Bank of England and Bank of Canada governor Mark Carney along with Michael Sabia, former head of Quebec’s pension fund, are within Trudeau’s inner circle likely quelled fears that rigorous economic reasoning left the cabinet along with Morneau.
While a replacement has yet to be announced, the loonie continues to play catch up the G10 rally in this post-pandemic period, highlighting the market’s confidence in Trudeau’s policymaking – likely due to Carney and Sabia’s involvement in the interim. The Canadian dollar has rallied over 0.7% thus far this week despite the political rotation and the rally has been a lot smoother than one would expect. Deputy Prime Minister Chrystia Freeland has been touted as a possible replacement, along with Foreign Minister Francois-Philipe Champagne and Jean-Yves Duclos – a Quebec economist serving as president of the Treasury board. The announcement of Morneau’s replacement is likely to have limited implications for the loonie in the short-term given that the Finance Minister’s job has seemingly been diluted by the inclusion of additional economists within the decision-making process. This isn’t necessarily the norm. Markets tend to assess the economic credentials of the new Finance Minister along with their economic and political leanings to price fiscal expectations accordingly. However, with deficit spending becoming normalised across developed markets in response to the pandemic, the replacement of Morneau within the cabinet is unlikely to sway the fiscal trajectory too much in the short-term.
That being said, the job isn’t an easy one to take over…
Sovereign credit downgrades, high levels of unemployment, record deficits are all in play and the new Finance Minister will enter the job just week’s before Trudeau’s carte blanche on spending expires along with the CERB scheme. Volatility could also arise should Trudeau fail to announce a replacement swiftly, with the currency likely to feel the effects of the rise in speculation that a bigger event, such as Carney’s matriculation into office, is on the horizon. Although the latter is a tail risk and would only be the result of a by-election held in Toronto centre.
One caveat to this view is that the participation of Carney and Sabia in the policymaking process isn’t necessarily a long-term deal.
With fiscal policy now an integral part of the economic recovery, it is unlikely that Carney etc will step back from the table by their own admission. However, further down the line towards the back-end of the recovery, when fiscal policy isn’t as glamorous as it is now, is another question. That is when the concerns over who sits as Finance Minister will begin to rise and markets will begin to judge the new Finance Ministers credentials, political leanings and their effectiveness at shoring up both the economy and fiscal balance sheet.
Morneau’s departure doesn’t derail the loonie’s rally as the Canadian dollar plays catch up in G10 markets
Loonie lags G10 rally post-pandemic
Author: Simon Harvey, FX Market Analyst