Elections no big deal for Canada's dollar

NICHOLAS KAMM | AFP | Getty Images

A sweeping election victory for Canada's Liberal Party failed to spark a knee-jerk reaction in the local dollar on Tuesday, leaving analysts more fixated on Wednesday's central bank meeting instead.

The center-left Liberals seized a majority of Parliament's 338 seats, ending a nine-year winning streak for the ruling Conservatives. That saw the local dollar, known as the loonie, fall a modest 0.2 percent against the greenback to $1.3046 during the Asian session before reversing declines to hit $1.2983 in early European trading.

Expectations were for a close race between the Liberals and Conservatives, with markets widely pricing in declines for the loonie should the latter fail to secure a fourth term in office. Liberal leader Justin Trudeau's plans to rack up a multi-billion dollar deficit over the next three years to invest in areas such as infrastructure have spooked financial markets afraid of political uncertainty, pushing the loonie down 0.3 percent in the week leading up to Tuesday.

However, the sweeping victory isn't likely to spark further weakness even when New York markets open for trade, according to analysts.

Read MoreElections, eh? Why Canada's ballot matters

"I don't see the victory as a major catalyst for the CAD and focus should now fall on Wednesday's Canadian central bank meeting for real direction," said Chris Weston, IG's chief market strategist.

Global currencies in race to the bottom
Global currencies in race to the bottom

"The Liberal landslide is no major hiccup for CAD, we don't anticipate much follow through on weakness," echoed Stephen Innes, senior eFX trader at online forex broker OANDA.

The election would have been more market moving if the opposition New Democratic Party fared better since that would have led to a minority government and sparked more uncertainty, he added.

"A budget deficit isn't a great thing but it's not so bad for Canada in the short term since they can afford it and it will result in more fiscal spending, which is a positive. Overall, oil prices and U.S. interest rates tend to be a bigger driver for Canadian markets rather than domestic politics given the lack of stark differences between political parties," Innes continued.

However, there is a chance of modest declines ahead.

Recent communications from the central bank have been surprisingly optimistic and combined with a flat money market curve, their message on Wednesday could turn more dovish and force markets to start pricing in some probability of an interest rate cut in the coming months, analysts at BNP Paribas explained in a Tuesday note.

Canada's status as a commodity exporter is another source of unease.

"While all commodity currencies have seen short-squeezes amid tumbling oil prices and a slowing Chinese economy, most of them have already fallen a lot whereas the Canadian dollar has more downside potential," noted Callum Henderson, global head of FX research at Standard Chartered.