The budget will be released at 2000 GMT
Canadian finance minister Bill Morneau delivers his final budget before the Fall election today. It will be designed to boost the economy and the Liberal Party's chances of re-election.
Leaks have been scares but there are indications of actions on a few fronts. Here are six of them:
1) Housing
Canada has been trying to strike the impossible balance of stabilizing the housing market and affordability. The Bank of Canada is part of the equation but regulations have slowly trumped the central bank as the main driver. Over the past few years the Federal government, along with provincial governments, have taken action to cool speculation, foreign activity and financial system risk. They may have gone too far with prices now cooling across the country.
Two policies may be targeted. One is pushing the length of insured mortgages back to 30 years from 25 years. The second may be a reduction in the qualifying buffer of 200 basis points. Under the current rules, buyers need to show they can afford a mortgage at 2% higher than the rate they will pay. A handful of other changes have been floated to stimulate the sector but the government is also wary of re-inflating the bubble. The loonie will react positively to anything stimulative but a lack of action or token change would be equally disappointing.
2) The deficit
I'll keep this brief: it doesn't matter. It's the kind of thing that newspaper pundits like to drone on about but Canada's debt to GDP is at generational lows and the government is borrowing at 1.74% for 10-years, one bps lower than the BOC overnight rate. With the curve inverted, it's a time for stimulus. If anything, the market will want to see that the government 'get it' and is ready to kick start growth.
3) Skills training
The government is almost sure to introduce some kind of employment insurance scheme for workers to be paid while they re-train. Companies have complained about skills training in BOC surveys and this is the government's solution. In the long-term, it's a decent idea in a world where careers are rendered obsolete due to changing technology but execution is key. The only markets that might be affected are companies that provide training.
4) Pharmacare
The government has explored the idea of a national pharmaceutical program. It's a bit early for this and I think it will be an election pledge instead, but you never know.
5) Individual taxes
Not much has been floated but if the government wants to buy votes, there is no better way that cutting individual tax rates. However this might be coupled with a hike in top rates as taxing the rich would shore up left-wing support for the Liberals. Any action on taxes would count as a surprise but it would be the best near-term news for CAD.
6) Infrastructure
It's a buzz word that's beaten to death by governments everywhere, including the one in Canada. The problem in Canada especially is that it takes 10 years to get shovels into the ground so it's tough to price in any real activity. One thing I'm watching for is a new $4B Toronto-Montreal train route but that's not something that's going to move the needle in the FX market.
Overall, I think there is scope for a positive surprise here. This government hasn't been shy about deficits in the past and the booming Canadian jobs market has left them with plenty of fiscal space to keep the deficit hawks in check. Some of the upside may be priced into today's 70-pip drop in USD/CAD so at this point, I think the better strategy is to trade the headlines, which will be released en masse at 2000 GMT. We will have real-time analysis.
