File image of Mark Carney © Simon Dawson, source & licensing: Bank of England.
Bank of America says fiscal expansion announcements due on November 4 hold bullish implications for the Canadian Dollar.
Prime Minister Mark Carney's government will announce its first budget on November 04, where new stimulus packages focused on investment are likely to be announced.
"Announcement of fiscal expansion plan on November 4 should also serve as a bullish catalyst for CAD, in our view," says Howard Du, FX analyst at Bank of America.
The government has signalled an intention to push the deficit to about 3% of GDP as it pursues growth via major projects and investment attraction, which implies that a decent increase in spending is coming down the track.
"We believe the sizeable fiscal expansion plan will likely be announced on November 4. Canada's budget deficits should have room to widen beyond -2% of GDP without attracting the attention of global bond vigilantes," notes Du.
He explains the latest levels of long-dated government bond yields, central government debt to GDP ratios, interest payment obligations, and overall budget deficits suggest Canada's fiscal situation is not in the same league as the U.S., UK, or France, all of which have faced negative fiscal shocks this year.
"The fiscal expansion should serve as a catalyst for lower USD/CAD, in our view," adds Du.
USD-CAD rose above 1.40 this week amidst a broader USD rally, with indicators suggesting it's more of a position-led move than one driven by improved USD fundamentals.
Nevertheless, CAD is holding out against the USD better than others, reflected in the fall in GBP-CAD by nearly 1% this week to 1.8630. EUR-CAD has meanwhile fallen 0.90% to 1.6233.
Increased government investments imply increased government spending, which could inject an inflationary impulse into the economy, prompting the Bank of Canada to ends its interest rate cutting cycle.
Should the market start to price in future interest rate hikes, then the interest rate setup starts to become outright bullish for CAD.
Another potential positive catalyst for the Canadian currency is Canada's impressive stock market rally, where year-to-date, the TSX has outperformed the U.S. and rest of the world.
In fact, the TSX is also on track for its best year since 2009.
Bank of America says there is a strong linkage between the stock market doing well and the real economy following suit.
"The equity market outperformance should still lend support to the growth recovery. Since 1975, following +20% rolling year-over-year rallies for the TSX, the subsequent quarter would see above-average GDP growth rate 77% of the time," says Du.
The stars could be aligning for a more durable spell of genuine CAD outperformance.