How the Canadian Dollar Would React to a NDP Victory

Tom Mulcair’s New Democratic Party continues to lead the polls of the 2015 Federal election.
Photography by: Sean Kilpatrick, THE CANADIAN PRESS

In the wake of the NDP’s provincial victory in Alberta, crowning party leader Rachel Notley the Premier, the party appears to be gaining momentum at the federal level. Stephen Harper’s recent Senate expense scandal has led to media strafing in popular articles such as this article by the New York Times, which serve as a boon to left-leaning political parties.

“Mr. Harper’s nearly Decade-long run…could be
coming to an end.”

The Canadian economy’s recent oil-drive woes will only further hurt the incumbent Prime Minister, as his competence as an economic steward will be called into question. If recent polls are any indication, Mr.Harper’s nearly decade-long run at 24 Sussex Drive could be coming to an end.

If the polls are to be believed, Tom Mulcair is poised to be his successor. If Mr. Mulcair were to ascend to Canada’s highest office, it would signify the first time Canada has had an NDP Prime Minister, putting the country in unchartered territory. Stephen Harper has made it well known that he thinks the tax-and-spend approach employed by the NDP would be catastrophic for the Canadian economy by raising debt levels without commensurate economic growth.  Mr. Muclair is indicating his plan would be different.

Uncertainty Reins

It’s obvious how Mr. Harper would react to a win by the NDP party, but it’s more interesting to speculate as to how the Canadian dollar would react. When uncertainty in Canada is high (political or otherwise), the Canadian dollar falls.

Ideologically, an NDP government represents a significant shift from the incumbent Conservatives.  The NDP have themselves stated that they plan to run the country (and by extension, the economy), much differently than the Conservatives have over the past decade.

“Markets tend to punish elected officials that have interests that run contrary to the interests of the private sector or banking system.”

With Stephen Harper, markets know the plan for Canadian economic growth. Lower taxes, empowering businesses, and minimal government intervention will continue to be the mandate. The NDP on the other hand, are hoping to make the Canadian economy less dependent on resource extraction and investing more heavily in the poor and middle class. What we do know, however, is that markets tend to punish elected officials that have interests that run contrary to the interests of the private sector or banking system.

Left-leaning political leaders succeeding Conservative/Republican predecessors, and the dollars resultant reaction:

Jean Chrétien (November, 1993-2003) When Liberal Jean Chrétien was elected in 1993, succeeding Conservative Kim Campbell, the market punished the Canadian dollar over the ensuing years, despite strong commodity prices.Average CAD/USD rate (1992-1995)

Barack Obama (2009-2016) When the Obama-led democrats defeated John McCain to succeed George W. Bush, the US dollar suffered a similar fate to the Canadian dollar during the Chrétien era. Average USD/CAD rate (2009-2012)

The Final Ballot

It appears that markets react to the election of left-leaning political leaders. In the short-run, the uncertainty caused by the election of left-wing political leaders hurts the dollar. However, in the long-run, markets adjust. An example is the recent surge in the American dollar despite Barack Obama’s left-leaning tendencies.

The falling Canadian dollar is a benefit to some and a worry to others.  Importers and travelers get hurt by a weak Canadian dollar.  It forces them to buy local.  Exporters benefit from being able to sell their products abroad to new customers as people with stronger currencies abroad can afford to buy from Canada more cheaply.  It is hard to tell what the appropriate level the Canadian dollar should be at for both sides.

If the NDP were to be elected in October, it would almost certainly hurt the Canadian dollar in the short-term. Over the life of Mulcair’s term, the original shock will fade, as the economic agenda of the NDP becomes clearer.

At the end of the day, the stronger the Canadian economy, the stronger the currency will get, over the longer term.

Photography By: Sean Kilpatrick, THE CANADIAN PRESS

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