Stock fall-out from U.S. election
A Democratic clean sweep in Tuesday’s U.S. elections could power the loonie to a shortterm high of 78 cents to the greenback, according to analysts who argue that such an outcome would likely fuel a risk-on approach in markets.
Results of Tuesday’s election were not available as of deadline. But national polls gave Democratic presidential nominee Joe Biden a sizeable lead entering Election Day, but those in battleground states such as Florida had tightened and were injecting even more uncertainty into an election where some pointed to a contested result as an inevitability.
Analysts have been 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.
The loonie, according to Osborne, currently holds a 75 to 80 per cent correlation to the S&P 500 and so anything that positively influences the index will have the same effect on the Canadian currency.
Market watchers have often suggested that 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 finally 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 78 cents to the greenback and 2022 at 80 cents. On Monday, it traded at around 75 cents.
CIBC deputy chief economist Benjamin Tal foresees a similar scenario unfolding in the short-term. A blue wave would generate a risk-on environment that would weaken the U.S. dollar, because temporarily, investors wouldn’t have as much need for a safe haven, and strengthen the loonie. In three months, Tal said the loonie would hit the 77-cent mark and could potentially climb as high as 78 cents.
Where his projections differ from Osborne’s is what happens thereafter. Once Biden has delivered the longwanted stimulus, the focus will move to his tax platform, Tal said. The U.S. dollar will once again emerge as a safe haven and in no time, the loonie’s rally will be lost and it will once again find itself trading around 75 cents.
“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 that its rally would only see it strike the 76 cents to 77 cents range with 80 cents being “a stretch.”
Harvey also sees Biden’s policies as being more beneficial to Canadian energy in the short-term. While U.S. energy would undoubtedly benefit from a Trump victory and projects like the Keystone XL might progress, Canadian oil would lose some of its competitiveness. Biden, through corporate taxes and a host of other measures that would impact the U.S. energy industry, may indirectly boost Canadian energy and yes, the loonie alongside it.
“If you’ve got demand for oil because the global economy is starting to get on track, if you’ve got more fiscal stimulus in the U.S. under Biden and if you’ve got a reversal and U.S. shale subsidies … that’s positive for Canadian oil competitiveness,” Harvey said.