BIDEN WIN BETT ER FOR LOONIE IN SHORT-TERM
Could push C$ to US 78 cents, say analysts.
A Democratic clean sweep in Tuesday’s U.S. elections could power the loonie to a shortterm high of US78 cents to the greenback, say analysts who argue that such an outcome would likely fuel a riskon approach in markets.
Analysts are mulling three potential outcomes. The first would see a continuation of the status quo with Donald Trump being re-elected and the Republicans maintaining the Senate. In the second, Biden would emerge victorious but would be hampered by a Republican Senate. The third, a blue wave sweeping across the U.S., would be the most positive for the loonie, according to Scotiabank chief currency strategist Shaun Osborne.
“The immediate driver of the Canadian dollar is what the election results mean for assets and the most constructive result for equities would be a Democratic sweep,” Osborne said.
Market watchers have suggested a Trump victory would most benefit stocks, but Osborne said that a Democratic sweep would be more significant — at least in the first few months — because it would signal that what investors most want, trillions of dollars in stimulus, will be en route.
In that scenario, stocks and the Canadian dollar would take off in a risk- on trade while the U. S. dollar depreciates, he said. Most of the rally would occur in the first few months of Biden’s presidency, but Osborne still has the loonie wrapping 2021 at US78 cents to the greenback and 2022 at US80 cents. On Monday, it traded around US75 cents.
CIBC deputy chief economist Benjamin Tal foresees a similar scenario unfolding in the short term. A blue wave would generate a riskon environment that would weaken the U. S. dollar, because temporarily, investors wouldn’t have as much need for a haven, and strengthen the loonie. In three months, Tal said the loonie would hit the Us77-cent mark and potentially US78 cents.
Where his projections differ from Osborne’s is what happens thereafter. Once Biden has delivered the long- wanted stimulus, the focus will move to his tax platform, Tal said. The U. S. dollar will once again emerge as a haven and in no time, the loonie’s rally will be lost.
“The first reaction will be a weaker American dollar and therefore a stronger Canadian dollar,” Tal said. “Beyond that, there will be more specific issues like energy, add to it the tax aspects in the U. S ... and any gain in the Canadian dollar will be a temporary gain.”
Monex Canada FX strategist Simon Harvey has the most conservative outlook for the loonie, estimating its rally would see it strike the US76 cents to US77 cents range with US80 cents being “a stretch.” Harvey also sees Biden’s policies as being more beneficial to Canadian energy in the short term. Biden, through taxes and other measures that would impact the U. S. energy industry, may indirectly boost Canadian energy and yes, the loonie alongside it.