October 19, 2015 / 8:44 PM / 3 years ago

Election jitters, oil slump weaken Canadian dollar

TORONTO/OTTAWA (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Monday as oil prices fell and as voters looked set to elect as prime minister a candidate who was promised to spend on infrastructure to stoke economic growth.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

After an unusually long 11-week campaign that was considered too close to call for much of it, polls showed a strong prospect that Conservative Prime Minister Stephen Harper’s government would be ousted or reduced to a minority because of a late surge by the Liberal party.

If elected, the Liberals, led by Justin Trudeau, plan to run deficits in order to increase spending on infrastructure.

“It’s looking like it’s going to be a Liberal government,” said Blake Jespersen, a managing director for foreign exchange sales at BMO Capital Markets. “Trudeau’s made it clear that he has some aggressive spending plans to boost the economy, and it’s not necessarily well liked by markets when government plans to spend their way out of trouble.”

Jespersen said worries about a potential Liberal victory may have accounted for as much as 20 percent of the weakness in the session, but that any election effect would likely not sustain itself beyond the day.

The Canadian dollar CAD=D4 ended at C$1.3019 to the greenback, or 76.81 U.S. cents, according to the official close from the Bank of Canada, weaker than Friday’s close of C$1.2911, or 77.45 U.S. cents.

The Canadian currency has strengthened more than 2 percent this month, in line with a broader move toward riskier assets.

But a drop in the price of oil, a major Canadian export, helped drag the loonie down on Monday. U.S. crude CLc1 prices settled down $1.37 at $45.89 a barrel. [O/R]

Analysts were also looking to a Bank of Canada interest rate decision on Wednesday. After two rate cuts this year, the central bank is expected to hold steady as it updates its economic forecasts.

With the market expecting rates to be held steady through the middle of next year, the risk is that the bank is more worried than the market about the effect low crude prices are having on capital spending plans, said Adam Cole, global head of FX strategy RBC Capital Markets.

Canadian government bond prices were higher across the maturity curve, with the two-year CA2YT=RR up 2 Canadian cents to yield 0.528 percent and the benchmark 10-year CA10YT=RR up 11 Canadian cents to yield 1.457 percent.

Editing by Jonathan Oatis and Steve Orlofsky

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