What’s in play for the Canadian dollar

Published on November 5, 2024

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This week's Canadian dollar bounce highlights the Presidential premium

The world of foreign exchange is multi-variate so you never get a full grasp on what's moving a currency on any given day.
Economics always overshadows politics and the US election has been playing out in the background for months. There are certainly election trades in equities and other pockets of markets but big macro trades have been tough to handicap, particularly because of the high probability of a divided congress.

Even last week as we entered the final countdown to the election, the signals were skewed because of a wave of top-tier economic data released alongside the final polls. Over a longer period of time, Treasury yields and the dollar have been rising but that's mostly been due to better economic data and a Fed that looks determined to run the economy hot.
But surely some of the moves in the dollar and bonds have been due to politics, but how much?

Today we are getting a clearer picture of the impact of the election, with 10-year Treasury yields down 7 bps on better Harris polls and that's spilled over into FX where the dollar is weaker. In particular, we've seen a 1% rise in the Mexican peso and about half that much in the loonie. Both of the currencies touched multi-year lows last week before today's bounce.
For the Canadian dollar, the shift in polls and the magnitude of the moves gives us a sense of how much the currency could move on the election.

For USD/CAD the pair is down 60 pips on the odds for President shifting back close to 50/50 from something like 60/40 for Trump. If you extend that to a win in either direction (which while certainly oversimplistic), it's something like a 300 pip move. I suspect is a bit high but 200-300 pips on a full sweep in either direction over the remainder of the week is possible.
(this translates like 1.5 cents to 2 cents in CAD/USD, or a rise as highs as 74-cents).

The Canadian and Mexican currencies are two of the more straight-forward trades on the election as Harris would represent the status quo while Trump would reopen the USMCA and likely hit both with tariffs. Mexico is seen as the more-vulnerable currency but the market may be underestimating how useful Harris' formative ties to Canada could be.

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