May 20th 2005
Canadian political crisis spreads to currency
The Canadian Dollar or ‘Loonie’ has declined to 7-month lows against the US Dollar, due largely to political uncertainty. And some analysts believe the worst is yet to come. The reason is most currency traders are valuing the loonie as though the current political crisis will soon resolve itself. In all likelihood, the current Prime Minister, Paul Martin, will soon be impeached. The PM’s budget is currently being mooted by Canadian Parliament; if conservatives have their way, the budget will soon be rejected. Such an event would likely send the loonie spiraling downward to new lows. Analysts are also careful to note other macroeconomic factors which may be contributing to the loonie’s decline. For instance, the recent decline in commodity prices has resulted in lower export revenues. In addition, a rising interest rate differential between Canada and the US may be driving risk-averse investors to move capital to the US. The Canadian Press reports:
The risk now is, the market is ill-prepared for the government to lose the vote. Even if risk-averse traders saw their worst fears realized and a federal election was called, experts say the volatility wouldn’t likely have lasted more than a few days. International traders would quickly lose interest and avoid buying or selling the dollar until election day.