More From National Bank on the Election Effect; On CAD, Interest Rates and Bonds, Provincial Credit

Last Updated: Monday, September 20, 2021 4:20 PM | MT Newswires

National Bank of Canada in its note entitled 'The election effect so far' noted the Canadian dollar is the worst performing major currency since the election was called. The loonie has shed 2.4% since August 13th and, as the bank wrote, was a 'hair's breadth' removed from its cheapest level of the year. "No one," National said, "would be expecting CAD to perform on this a major risk-off day, but control for underlying risk sentiment and the loonie still looks statistically undervalued relative to traditional drivers. In other words, the vote may have had a modest negative impact on the currency. Various short-term statistical specifications hint at an election impact of at least one cent and there's an increasingly yawning (perhaps unprecedented) gap relative to our longer-term 'fair value' model."

While currency markets hint at some displeasure with what's transpired on the campaign trail, the impact on interest rates "appears negligible", according to National. Technically, it noted, Canadian rates have underperformed U.S. Treasuries by the smallest of margins during the campaign, but the bank is loathe to dub this a legit 'election effect'. National added: "Adjust your time horizon to the days/weeks before the writ dropped, and Canada morphs into a relative outperformer. This is coincident with some underwhelming economic data which we consider a more predominant driver of rate differentials. To us, there's little evidence that bond investors have balked at taking on incremental GoC risk, despite various party promises to spend more."

As for provincial credit, one could argue that the election (and the various promises it has spawned) might actually be good news for the provinces, National Bank said. All the major parties tend to agree that the feds should spend more on health care, and all seem willing to serve up marginal fiscal supports post-vote. The bank added: "That extra federal fiscal impulse could help secure the post-virus recovery and obviate the need for provincial finance ministers to bring their own stimulus. Positive fiscal updates continue to arrive, yet provincial credit is trading a touch cheap to 'fair value', leaving us relatively constructive all else equal."

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