Canada is undergoing a political crisis with potentially far-reaching implications. The investigation concerns members of the Liberal Party of Canada, who may have received kickbacks in exchange for lucrative advertising contracts. The most prominent member of the Liberal Party happens to be Paul Martin, the Prime Minister of Canada. It is distinctly possible that Canadian Parliament will force an ad hoc election to see if Paul Martin shall remain Prime Minister.

It is extremely difficult to forecast the effects this type of crisis will exert on the economy, especially in a nation is perennially stable as Canada. Regardless, many investors are rushing for the exits, selling Canadian equities and Canadian Dollars. It is uncertain whether the political crisis is solely responsible for this flight of capital. Many analysts point to recent declines in the prices of global commodities, which could adversely effect Canada, a nation rich in natural resources. In addition, the Central Bank of Canada does not look set to raise interest rates, while its counterpart to the South will likely continue to raise rates at a measured pace. For all of these reasons, it will probably not be smooth sailing for the Canadian Dollar. Globeandmail.com reports:

"Political uncertainty may now be filtering through into foreign exchange markets," concurred Avery Shenfeld, senior economist at CIBC World Markets Inc. "We’re getting a lot of calls about the odds of an election in the next few months. It has forced the markets to put a political-risk premium into Canadian assets, whether it’s stocks, bonds or the currency," he said.

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