Elections unlikely to impact on CAD but commodity prices do

The Canada's Federal election has been nearing that is scheduled on 19^th October and will garner more market attention as it approaches. The latest Ipsos Reid poll raises the possibility of a minority government, with the Liberals at 33%, the Conservatives at 32% and the NDP at 27% (+/-3.0%).

Nonetheless, our recent work on the performance of CAD around elections dating back to the 1970s shows that CAD has not reacted in a clear, conclusive way to the outcomes. We therefore do not look ahead to the election to have a pronounced impact on the currency and view it as a neutral factor.

The current WTI market price of USD 49.37 is well below the assumption of USD 60 that was contained in the Bank of Canada's July Monetary Policy Report. The mounting expectations of average annual WTI prices not to return above USD 60 until next year, USD/CAD should remain supported by this dynamic. We think Canada is showing stronger signs of transitioning to non-commodity, non-housing driven growth.

Although the recent improvement in the Canadian economic data has RBC Economics monitoring an annualized increase of 2.5% for Q3 2015 GDP versus the BoC's forecast of 1.5%, we do not expect the BoC to raise interest rates until Q3 2016 amidst evidence of a more sustained recovery in commodity prices and growth metrics.