We want to bring to your attention something we believe has yet to be priced into the markets regarding the Canadian dollar. The CAD was able to claw back most of last week’s losses on the back of a rise in non-energy exports and pretty healthy jobs report. However, the market has been complacent about the possibility of a change in government on the October 19th federal election. Current poles show that it is a three way race with the left-leaning New Democratic Party (NDP) enjoying a narrow lead. The NDP’s platform includes an extensive social agenda and the imposition of a cap-and-trade system for carbon emissions, which could endanger the drive to a balanced budget and a potential threat to energy investment, at a time when the sector is already under tremendous pressure.
Thus, if the NDP continues to rise in the polls then international investors could start to worry, which could weigh heavily on the CAD. Furthermore, this past Wednesday the Bank of Canada decided to stand pat at the policy meeting in order to stay politically neutral ahead of the federal election. However, the BOC may be forced to cut the benchmark interest rate at the October policy meeting after the election if oil prices are below the BOC’s own forecast and if domestic data continues to weaken.
The key event next week is Thursday's U.S. Fed interest rate announcement. There is about a 30% probability of the first Fed rate hike since June of 2006. Stay tuned for both Canadian and U.S. retail sales and inflation data reports which will be announced before the FOMC committee meeting.
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