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Three Reasons Why the Conservatives Will Make You Looney for the Loonie

May 09, 2011 9:24 AM ET
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For the first time since 2006, Canadian Prime Minister Stephen Harper is going to lead a majority government. Canada's fourth general election in seven years resulted to his party, Conservative Party of Canada, winning 167 out of 308 seats in the House of Commons.

Even though there wasn't a royal wedding or villain-slaying involved, I would have to say that the Conservatives' win was a Disney-esque story in its own right too.

As I mentioned in my blog a couple of months ago, the three major opposition parties (Liberal Party of Canada, New Democratic Party, and Bloc Québécois) in the country voted against the budget plan that the Conservatives drafted. Consequently, this forced the government to conduct a general election.

But I guess karma really has a way of biting you in the butt. Whatever the opposition's plans were to diminish the Conservatives' popularity, it seems to have back-fired. In fact, the election resulted in the collapse of the Liberals and the Bloc Québécois!

I won't delve deeper into the political implications of the election. Instead, I'll let you in on what the buzz is in the FX hood. From what I've heard, the majority government in Canada will make you looney for the Loonie!

Here are three reasons why:

No more political uncertainty.

Political uncertainty and investors are like ketchup and frozen yogurt - they never go well together! Currencies tend to weaken with political uncertainty, as we have recently seen with the yen when Japan switched prime ministers and with the dollar when the U.S. government nearly shut down. The Loonie isn't any different. A few market junkies say that one of the reasons why it wasn't able to rally so much against its counterparts was because of fears of another hung parliament.

But now that the Conservatives have a clear majority, there's one less issue to worry about when investing in Canada or the Loonie. It will be easier for markets to anticipate which direction Canada's economic and fiscal policies are headed.

Investors got what they wanted.

Although Canada's debt isn't as bad as that of Portugal or Greece, standing at just 34% of its GDP, that doesn't keep Stephen Harper from showing off his eagerness to maintain the country's fiscal health.

Now that he has more friends in Parliament, I don't see him having a lot of problems in getting the votes he needs to carry out his budget plans. And I'm not the only one who thinks so! A few economic gurus even say that with a Conservatives-dominated Parliament, Canada would likely print a budget surplus by 2014, a year earlier than what was estimated in March!

On top of that, Harper should be able to get on the good side of investors and improve Canada's reputation with international companies. He promised to make some industries more open to foreign ownership and competition. However, the government sent an unwelcoming message to foreign investors last year when it vetoed the acquisition of Potash Corporation of Saskatchewan by the Australian company BHP Billiton. With the majority of parliament on his side, I don't think he has any more excuse not to keep his word.

Canadians are happy.

A few analysts argue that the success of the Conservatives should give Canadians more reason to smile.

Aside the sense of solidarity that Canadians might have gotten with a majority government, perhaps the most important implication of the election is lower corporate income taxes by 2012 to 15.0% from 16.5% in 2011.

Think of all extra the moolah that companies can get to spend in employing more people! I think that this will eventually translate to higher consumer confidence and spending, which in the long-run would help boost the economy. And we all know that investors love a strong economy, right?

Looking at the charts, we see that the Loonie lost against the dollar in the days following the release of election results. Consequently, this has led to talks about how the successful election still has not been priced in in the markets. Some market junkies are saying that we'll Loonie pare the losses it incurred when word about the possibility of another hung parliament spooked traders.

USD/CAD Daily Chart

But do you think the majority government will be bullish for the Loonie, or do we have to see it deliver results first? Vote in the poll and tell us why by writing your comments in the box below, or hit us up on Twitter or Facebook!


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