Following elections that return Stephen Harper to power in Canada last weekend, HSBC is outlining four reasons to buy the Canadian dollar.
“This is a better than expected result for the party, as prior to the election the Conservative Party only managed to have a minority government. The likelihood of a more stable government in Canada is positive for the Canadian dollar,” David Bloom, the global head foreign exchange strategy at HSBC, told CNBC on Monday.
With the economy strong, Bloom says economic fundamentals, a strong fiscal position and all those commodities should also underpin the Canadian dollar.
“The currency’s attributes are also being complemented by an overall weak US dollar,” said Bloom, who warns the greenbacks' weakness has acted as tightening of monetary conditions at a time when Canadian economic weakness is also pointing to more hikes from the Bank of Canada.
“This creates a more complicated policy debate for the BoC, as current economic conditions and the Bank’s own forecasts strongly suggest that further interest rate increases are needed,” he added.
"But doing so now would lead to the very type of appreciation for the Canadian dollar that is currently skewing monetary conditions. Ultimately, we expect the BoC will come down on the side of further tightening,” said Bloom.
Therefore the US dollar will remain under pressure versus the Canadian dollar until next year in Bloom’s view.
“We now expect USD-CAD to remain at the 0.95 level for the next six months or so, before drifting to parity by the end of the first quarter of 2012,” he said.