Canadian dollar safe haven in election campaign

Trump's Covid-19 contagion adds a new dimension to the already unpredictable battle for the US presidency. For now, the Canadian dollar is one of the few winners in this fight.

The news that US President Donald Trump has been infected with Covid-19 gave the dollar a striking boost at the end of this week. The US currency is often in demand as uncertainty in the financial world increases. As a result of the contamination, Trump is temporarily suspending his election campaign. This makes the race for the presidency a little more unpredictable.

Those who hoped that the first debate between Trump and his Democratic challenger Joe Biden would bring some more clarity, was disappointed. It was a terrible display in which the candidates missed every opportunity to interrupt or insult the other. The debate was more like a raunchy bar brawl than a mature exchange of views.

In fact, the evening only had losers. Although? A data journalist from The Economist tweeted Tuesday night that the number of Google searches for "moving to Canada" immediately after the debate skyrocketed. In several respects, the northern neighbor has a clear advantage over the United States.

Long live the loonie
The loonie (nickname of the Canadian dollar) has risen 5% against the US dollar in the past six months. The USD/CAD exchange rate of 1,33 is roughly at the same level as it was a year ago. This makes the loonie show remarkable strength.

The Canadian economy is heavily dependent on oil exports. And the price of a barrel of Brent oil has fallen by almost a third in twelve months. Usually that doesn't bode well for the loonie, but this time it's different. The currency's resilience is in part due to the Canadian central bank.

Like the Federal Reserve, that bank has cut interest rates from almost 2% to just over 0% within twelve months. However, the support measures are comparatively less extensive than the enormous packages unfolding in the United States.

political security
Another benefit for the loonie is that the number of Covid-19 infections in Canada is growing relatively less quickly. Economic momentum was expected to be somewhat stronger in the third quarter than in its southern neighbours.

Moreover, the country does not suffer from the electoral nerves that have gripped the United States. Prime Minister Justin Trudeau is not only Covid-19-free, but his second term will run until the fall of 2023. It is precisely due to the political uncertainty that the Canadian currency may still gain some ground.

In the longer term, it is less certain whether the loonie will succeed in building or maintaining profits. Canada has a significant trade deficit. If the oil price does not recover as if by magic, the currency will come under pressure sooner or later.

Prefer a currency from under the US
The prospects for that other border country of the United States are better. The Mexican peso is under considerable pressure this year. Due to the Covid-19 uncertainty, many parties are opting for the security of hard currencies.

Moreover, the Mexican economy – like that of many other emerging countries – has been hit relatively hard by the pandemic. The downside is that there is also a lot of room for recovery once a vaccine hits the market. Or if an American president takes office who does not want to build a large wall on the border.

Since the turn of the year, the peso has fallen 14% against the US dollar. The chances of the currency making up for some of that loss in 2021 seem higher than the possibility of further gains in the loonie.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.