Loonie softens as political risk weighs

Thu Apr 28, 2011 5:00pm EDT
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By Solarina Ho

TORONTO (Reuters) - The Canadian dollar drifted lower against the U.S. currency on Thursday, as uncertainty over the upcoming federal election offset broadbased weakness in the greenback.

Canada's May 2 election has created headwinds for the currency in recent days as support for the left-leaning New Democrats unexpectedly surged.

The latest polls show the Conservatives are still set to win the most seats, but differ on whether its lead over the NDP was growing or shrinking.

"A bit of political uncertainty is probably really what's getting headlines right now and that's probably what's keeping the Canadian dollar relatively unchanged and underperforming the major currencies," said Benjamin Reitzes, an economist with BMO Capital Markets.

"Uncertainty is never good for the currency."

Analysts warned that big gains for the NDP could trigger a knee-jerk drop in the currency and Canadian equity markets as investors fret about NDP plans to raise corporate taxes, spend more and redo energy policy.

"The election may well result in more, not less, political uncertainty, which could translate into increased CAD volatility," David Watt, senior fixed income and currency strategist with RBC Capital Markets, said in a note to clients.

"If the polls do result in the NDP's seat total rising materially, which is far from a foregone conclusion, CAD might experience a modest sell off. However, such an outcome is not unequivocally clear."   Continued...