Canada Election Playbook & Brexit's Latest

Canadian voters head to the polls on Monday with USD/CAD trading near an 11-week low. We scope out how to trade it, especially as CAD is the strongest currency since the start of the year. GBP is trading at 1.2980s after printing 1.3012 earlier this morning ahead of a meaningful vote request at 15:30 London time. Even if the request is voted down, there is optimism that PM Johnson's deal will be passed in Parliament later this week. MPs delivered a setback to Johnson on Saturday after voting to defer approval of his Brexit deal. But traders remain confident that his withdrawal agreement will pass by a tight majority. CFTC positioning data continues to show a massive pound short; and it's surely feeling the squeeze.

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USD/CAD fell to the lowest since July on Friday as it broke the September low of 1.3134 and the July trendline support. Is that a sign? Perhaps--But it's probably a reflection of broad USD weakness and positive sentiment in commodity currencies. If anything, the loonie has been suppressed in the run-up to the election. It has trailed AUD and NZD by about 1% since the start of the month, although some of that is also explained by oil weakness.

The election playbook is generally similar to all elections in stable democracies – Buy (counter) the uncertainty. Fear and worry take over ahead of all elections but once the smoke clears, there is always some sense of relief and money goes back to work.

In Canada, the stakes are low. Polls show Trudeau's governing Liberals and the opposition Conservatives in an dead heat, but both are relatively centrist parties. The wider distribution of the Liberal vote, last-minute incumbency effects, and better coalition options makes Trudeau the betting favourite to remain Prime Minister at about a 65% probability.

In the event of a surprise ---and/or Conservatives win a majority, that would be the most CAD-positive outcome, as it re-establishes optimism on crude exports especially via corporate tax cuts. A Liberal majority may also be a modest CAD-positive because it lowers some of the tail risks and because it would add four years of relative stability.

Neither party is likely to win a majority, in which case uncertainty may a few days and CAD weakness. The main fear is that the Liberals would be forced to work with two or more other parties, who would demand pipeline construction shutdowns. Those fears are overdone but could lead to a 1-2 cent fall in the loonie that would ultimately be a buying opportunity. The question is: Considering the resulting uncertainty, the timing of CAD's recovery remains unclear, especially as equity indices' gains are primed for a pullback.

On election night, the trade is to buy CAD on a Conservative majority or any dip on a Liberal majority. Otherwise, wait for better levels or a wild overreaction. Results will begin to cross at about 0030 GMT but it probably won't be until the West coast votes 3-4 hours later that we get any kind of clarity.

CFTC Commitments of Traders

EUR -75K vs -75K prior GBP -73K vs -73K prior JPY +7K vs +11K prior CHF -13K vs -11K prior CAD +13K vs +5K prior AUD -48K vs -46K prior NZD -40K vs -38K prior

The numbers only cover through the close last Tuesday but cable had already climbed more than 500 pips from the lows so it's a surprise there was virtually no short covering. If you're long, it means there is still potential for a significant squeeze.