USD/CAD: Workable majority in Canadian parliament to help the loonie to benefit from good fundamentals – ING

The Canadian dollar has likely discounted some degree of political uncertainty. Economists at ING think a workable majority should ultimately be the key to allow the loonie to benefit from good fundamentals

A workable majority is what matters the most for CAD

“The best-case scenario for CAD is undoubtedly a majority win by either one of the two parties, but that seems to be a low-probability outcome if the latest polls are to be trusted. The most likely scenario of either the Liberals or the Conservatives winning most seats but having to rely on other parties (either on a case-by-case basis like the latest government, or through coalition deals) to govern may ultimately have a quite contained impact on CAD.”

“A minority win would pave the way for a potential hung parliament. We should know more on Tuesday, as post-election comments start to outline the different possible political scenarios, but from an FX point of view, we think that any political-noise risk premium embedded in CAD may remain in place until a clear working majority materialises.”

“The latest data (labour market and inflation) have all but confirmed the view that the Bank of Canada will have to step in with another round of tapering in October, which should leave it on track to fully unwind QE by year-end, or by early-2022. The set of good fundamentals should provide some sustained support to CAD into year-end, and we expect USD/CAD to trade consistently below 1.25 in 4Q21.”