Canadian Dollar a Good Trump Hedge: ING

Image © Bank of Canada

ING says the Canadian Dollar can prove a useful market hedge against a win by Donald Trump in the November 05 presidential election.

"One of our key calls in G10 FX in October has been a stronger CAD versus AUD and NZD as markets build their hedging against a Trump re-election," says Francesco Pesole, FX Strategist at ING Bank.

ING says the midweek decision by the Bank of Canada to step up the pace at which it cuts interest rates - by delivering a 50 basis point reduction - does not change its view on CAD heading into the election.

"We were taken slightly by surprise by the dovish BoC, but markets had already priced in this 50bp move and the CAD curve has been skewed to the dovish side for some time. CAD was only marginally impacted by the decision," says Pesole.

The Canadian Dollar has firmed over the course of the past week in tandem with growing betting market odds of a Trump win.

Betting market odds are proving a proxy for financial market expectations, and CAD's outperformance comes in tandem with a similar outperformance by its southern neighbour, the Greenback.

"Soft Canadian data can hit CAD next month, but in the near term we still think the loonie can show some resilience in the crosses due to its relative safe-haven status compared to other high-beta currencies with regards to the Trump risk," says Pesole.

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He says a break above the 1.392 August high for USD/CAD can pave the way for a move to 1.40.

CAD merely shrugged its shoulders at the Bank's decision to cut interest rates by 50 basis points on October 23 while indicating further cuts were in prospect.

The decision to go with a hefty 50bp cut comes as the Bank sees inflation risks as subdued and is keen to bolster growth.

The Bank said it "took a bigger step" because Canada had returned to an environment of "low inflation" where risks to inflation undershooting are now "equally" of concern to inflation overshooting expectations.

"An outsized rate cut was a no-brainer, and the simple message from the Bank of Canada is that there’s more to come if events unfold as expected," says Avery Shenfeld, an economist at CIBC Capital Markets.