Canada’s Trudeau clings on, but loonie remains unimpressed

As was widely expected, elections in Canada didn't yield a majority, but prime minister Justin Trudeau's Liberal party managed to secure most seats in the House. The Liberal party will have 157 of the 338 seats, 36 more than the Conservatives (who, however, received more votes in absolute terms).

In comparison to the 2015 elections, the Liberals lost 31 votes and the Conservatives gained 32, but the big surprise came from the Bloc Québécois that secured a third-place while the Greens failed to boost their numbers.

Justin Trudeau will be able to maintain his role as prime minister, but will now need to rely on other parties to support his policies. Most suggest that a deal (formal or informal) with the New Democratic Party (NDP) is on the cards now. The alternative would be to continue governing alone and seek support on an issue-by-issue basis, which appears to be a more risky move given the rise in seats held by its biggest opposition - the Conservatives and the BQ.

Speculation about a Liberal-NDP coalition had mounted even before the elections when opinion polls suggested that winning an absolute majority was almost unachievable by any party alone. Also, the NDP leader, Jagmeet Singh, did not rule out a political agreement with Trudeau during the campaign period.

Assuming Trudeau decides to go ahead and seek some kind of agreement with the NDP, the key question is whether the conditions that Singh will put on the negotiating table will be acceptable for the prime minister. It seems likely that discussions will hover around two key areas: welfare and climate policy.

We're not excluding 'delayed' political impact on the loonie if there is some uncertainty in the coming days or signs of negative spillover in the energy sector

For the first one, there seems to be more common ground: the NDP will likely push for accessible-healthcare and higher taxation to the wealthiest, which may not find excessive resistance to fit into the Liberals' agenda. On the climate side though, there is a key hurdle. While both parties advocate for more environment-friendly policies, they disagree on oil pipelines projects.

Last May, Trudeau’s government nationalised the Trans Mountain pipeline (for C$ 4.5bn) in a deal that included the expansion of the pipeline, however, the NDP has widely campaigned against the project. Last week, Singh said: “I’m fully opposed to Trans Mountain. I’ve been opposed to it, I will continue to be opposed to it”.

And so, it seems fair to conclude that the pipelines will be one of the stickiest points if talks between Liberals and the NDP progress.

The Canadian dollar had a more muted reaction to the election results than we had anticipated displaying only minor swings as the Liberal victory started to hit the headlines.

Given that the elections took place during a period of market-driving events (Brexit deal, US-China negotiations, upcoming Fed and Bank of Canada meetings), might partly explain why investors somewhat “bypassed” the elections.

However, on a market perspective, there are two key takeaways:

1. Justin Trudeau has lost some grip over his government and past experiences of minority governments in Canada warrant some political instability shouldn't be ruled out
2. The implications for the energy sector and oil pipelines don't appear to be very positive: the NDP, BQ and Green all oppose the pipelines. The Conservatives are in favour, but maybe quite reticent to support their biggest political opponent.