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USD remains stable; CAD risk dissipates with another Liberal minority government

USD - US Dollar

Market’s focus is firmly on Chinese property developer Evergrande’s distressed financial situation and the possible spill-overs into the broader Chinese real estate sectors. Chinese markets are closed for a second consecutive day due to a national holiday, and the Hang Seng continued to be the absorb investors’ concerns, although only trading 0.5% lower this morning. We could be looking at some tentative signs of stabilization in market sentiment today after yesterday’s big slump in equities, but with Chinese markets re-opening tomorrow, it seems too early to expect calmer waters just yet.

In FX, the sharp drop in equities has not translated into USD strength across the board yesterday and this might be due to some investors possibly expecting that the Fed will refrain from sending any hawkish signal given the current turmoil in the stock market.

CAD - Canadian Dollar

The incumbent Liberal Party led by PM Trudeau will likely form another minority government with the left-leaning, natural ally, the NDP, which would maintain the status quo. With postal votes yet to be fully counted, the Liberals are projected to have won 157 seats, which is short of the 170-seat majority it was seeking when Trudeau called the snap election, but still larger than the 121 seats projected to have been won by the Conservative Party. Bloc Quebecois is expected to have won 31 seats, the NDP 27 and the Greens 2. Despite the unpopularity in the electorate of Trudeau’s decision to call a snap election during the fourth wave of Covid, the Liberals are projected to have lost no seats; the Conservatives are also projected to have kept the same number of seats relative to 2019. The NDP is expected to have picked up three seats, which will give it only modestly more say in a coalition with the Liberals. A bit of the political uncertainty baked into the CAD around the election will ease. This would be a modest boost for the currency, however, in our view. Models show USD/CAD was trading only modestly above its short-term fair value ahead of the election. Indeed, we believe a surprise win by the Conservatives would have been a larger positive for the CAD given the Party’s larger spending pledges and looser environmental regulations for businesses. The new minority government will press ahead with its spending pledges as well as an increase to the corporate tax rate on companies with profits over CAD1bn and the imposition targets on petroleum producers every half-decade starting in 2025.

EUR - Euro

The intensifying central bank activity this week means that the focus should mostly be on EUR crosses as other European currencies may see idiosyncratic drivers while the eurozone’s calendar looks quite dull before Thursday’s PMIs. Incidentally, remarks by some ECB speakers have followed the recent cautiously optimistic stance heard around Frankfurt, and ultimately had no impact on the euro. We do not expect anything different should vice-President Guindos deliver some policy-related comments this morning. EUR/USD should remain solely remain driven by the dollar and global sentiment dynamics. For now, the EUR’s low-yielding status appeared to keep the common currency relatively protected from swings in sentiment, especially when compared to the GBP.

Currency Chart

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