Loonie’s weakness unlikely to be sustained – MUFG

USD/CAD is trading under 1.28, falling from the highs, after Canadian Prime Minister Justin Trudeau won reelection though failed to achieve an absolute majority. In the view of economist at MUFG Bank, CAD sell-off looks overdone in near-term.

More fiscal support on the way following Canadian election

“In contrast to more marked weakness in the Canadian dollar recently, the price of oil is continuing to hold up better. The resilience of the price of oil is suggesting that Canadian dollar weakness is overdone in the near-term.”

“Prime Minister Justin Trudeau is poised to win a third term following yesterday’s snap election although his Liberal party is set to fall short of winning a majority. Even with another minority government, the early results suggest that the Liberals will have a stable government most likely backed by the left leaning New Democratic Party. It would allow Prime Minister Trudeau to continue running loose fiscal policy to support the economic recovery.” 

“The additional short-term spending is expected to provide more support for growth next year, and should encourage the BoC to continue tightening monetary policy as they remain on track to begin raising rates during the second half of next year.”

“The developments support our view that recent weakness in the Canadian dollar is unlikely to be sustained beyond the near-term.”