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USDCAD: Bias growing to the upside as liberals take the majority - TDS

FXStreet (Delhi) – Research Team at TDS, note that the Canada’s Liberal party unseated the conservatives in a big way with a majority victory and a change in government is typically USDCAD positive owing to an uncertainty premium related to changes in legislative priorities.

Key Quotes

“In this case, we note that this has been offset, somewhat, by the majority outcome, which has eliminated the complications often encountered when trying to form a minority government. Indeed, USDCAD is virtually unchanged this morning. The Liberals have campaigned on a platform of infrastructure spending. Importantly, we do not expect this to alter the BoC’s policy stance as the planned fiscal expansion appears to be relatively small and is unlikely to be felt until late next year.”

“While a Liberal majority indicates there is no election risk for another four years, we think the focus for CAD will shift quickly to the overall global backdrop. Here, we expect the broader USD tone to drive price action in funds over the next several weeks.”

“The Bank of Canada will announce its interest rate decision tomorrow. We expect policy to remain on hold but reflect a cautiously upbeat tone in the communique. Importantly, we think that the MPR will be even more cautious and the growth forecast in Q4 and into 2016 will be downgraded.”

“In terms of USD tone, it has been softer since the September Fed decision but one has to think that even if the Fed is not hiking until 2016 (TD expectation is March), the Fed is still much closer to normalizing policy than the BoC (which is expected to remain on hold at least until the middle of 2017 barring a deterioration in the domestic economy). Additionally, with Fed expectations very benign through 2016, the risks still seemed biased to the upside at the moment.”

“We maintain the view that 1.28/1.29 is a key psychological support level and current levels still offer an opportunity to add small USDCAD longs. We noted last week that daily technical indicators suggested that USDCAD was forming a trough.”

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