Elections in Canada: What does it mean for CAD?

Summary:

• Canadians are going to ballot boxes today
• A final outcome is likely to be a toss-up as Conservatives and Liberals go neck-and-neck
• Trudeau is likely to keep his post as PM, a net impact on CAD should be broadly neutral

Canadians are going to ballot boxes on Monday to take part in the federal elections. Although the recent polls have been extremely inconclusive, we think that a net impact on the Canadian dollar should be rather muted. Here is a brief summation on what to expect. 

Outline

The Candian Parliament consists of the Governor General, the Senate (an upper house) and the House of Commons (a lower house). While senators (105) are appointed directly by the Governor General, members of the lower house are elected in federal elections. The lower house consists of 338 seats, hence to get a majority a political party needs as many as 170 seats. Currently, the Liberals (the party governed by Prime Minister Justin Trudeau) hold a majority having 177 seats. The Conservatives, the second largest political power in Canada, have 97 seats and the New Democratic Party holds 40 seats.

Polls

The Liberals and the Conservatives have been going neck-and-neck in the weeks preceding the federal elections. Source: Wikipedia

It is going to be an extremely tight race between the two largest political parties as both the Liberals and the Conservatives have been very close to each other in the weeks preceding the federal elections. In turn, while the NDP has gained momentum since the start of this month, it is also unlikely to endanger the two above-mentioned parties. When it comes to possible coalitions, Trudeau has yet to specify if he would be interested in entering such agreements, and it seems that a lot will depend on a margin between the Liberals and the Conservatives in the elections. 

Precedence

Taking into account the latest polls one may expect that neither the Liberals nor the Conservatives will hold a simple majority after the elections, however, it does not have to necessarily mean political chaos ahead. This is due to a precedence rule stipulating that the incumbent party has the first right to attempt to continue governing even it it fails to win the most seats. If Trudeau manages to secure enough votes (from third parties) to win the confidence vote, then his party is likely to continue governing even without a majority in the House of Commons. Though, such a government may have less legislative power in passing subsequent bills through the Parliament. 

Results

Depending on the region, the elections start between 7 am and 8:30 am and last 12 hours. Exit polls are expected to be released right after the voting stations close. Therefore, expect (if any) more volatility on the CAD overnight (European time) which could be exaggerated by thin liquidity. 

FX impact

Having in mind that a difference between the Liberals and the Conservatives is likely to be tiny, and the fact that the Liberals are largely seen to have the first right to forge a government, we think that a net impact on the Canadian dollar could be limited. Our notion is also shared by option traders as no jumps in implied 1-week volatility have taken place so far this month.

After breaking below the bullish trend the USDCAD has been unable to come back above it. Technically we see the pair is heading down after bouncing off the upper bound of the bearish channel. The first important support could be found nearby the lower bound of this structure. Source: xStation5