Canada's finance minister quits politics
When a finance minister quits for fiscal reasons, it usually has an effect on the currency; when he quits because of an ethical lapse, that's usually not the case.
The headline story that brought Canadian Finance Minister Bill Morneau down was an ill-advised contract to a charity that had previously paid for his travel but there may be more to the story. A handful or recent reports suggest Morneau was pushing to be more fiscally prudent than Trudeau and that was ultimately his downfall.
If so, this will be another example of fiscal conservatives losing power. I believe that a critical mass of voters have turned away from austerity and towards delusions of free money. Some of that is their own making because fiscal conservatives cried wolf on deficits for the past 30 years with few negative results.
In the writing of history, the last gasp of this era's fiscal conservatism will likely be short-lived UK Chancellor Savid Javid. He tried to hold the line at the start of the pandemic and was forced out by Johnson, who better-read the collective move. More importantly, here's how electors view his easy-spending replacement, Rishi Sunak:
Voters want a free lunch.
Is Canada another chapter? It probably is. At the same time, Morneau was nothing like Javid. He ran the largest deficit in Canadian history by a factor of 7.
Still, the post-COVID chapter in government finance ministries is likely to be wildly divergent. Some countries may try to quickly reign in spending, while others may wish to super-charge the recovery. A $200B deficit in Canada has cushioned the economy in a pandemic; why not find out what $200B can do in a decent economy? Especially with central bankers repeatedly telling governments that inflation won't be a problem.
That's dangerous thinking.
So what about Morneau's reported replacement, Chrystia Freeland?
We don't know exactly where she stands but she's very-closely aligned with Trudeau. My strong suspicion is that she is more-likely to keep the fiscal taps open. If she's in the business of winning elections and eventually mounting a campaign to be PM herself, that would be an optimal strategy.
I believe that QE will keep rates repressed for years and that markets won't discipline overly-loose fiscal policy at least until the middle of the decade.
That brings us to the currency. The Canadian dollar is essentially unmoved by Morneau's departure. It's 0.3% higher today but that tracks a broad move in the US dollar to the downside. If anything, the loonie is fractionally underperforming as the US dollar takes a beating.
And I think the US dollar is the tell here. The scope for more US stimulus is dwindling and the chances of Republicans holding onto the Senate in a Biden election win are edging back higher. That means the US will be forced back into the late-Obama austerity box as Republicans conveniently rediscover fiscal prudence.
At the moment, the FX market doesn't like that. Money is gravitating towards better growth in the short-to-medium term and easier fiscal policy is the key lever with monetary policy bottomed out everywhere.
So overall, I ultimately the Canadian dollar to benefit from spending that will boost growth in 2021 and beyond. The quality of that spending and how much growth it generates will be critical beyond that.
