Canadian unit slides on political uncertainty

PUBLISHED : Sunday, 03 October, 1993, 12:00am
UPDATED : Sunday, 03 October, 1993, 12:00am

THE Canadian dollar ended trading last week at a six-year low against the US dollar despite aggressive intervention by the Bank of Canada. The Canadian unit fell 1.4 per cent as investors reacted to opinion polls indicating that the Liberal party is likely to oust the Conservative party from power in the election on October 25. In addition to political uncertainty, speculation of a wider-than-expected Canadian budget deficit for fiscal 1993 dampened Canadian dollar sentiment.

The continuing nature of these adverse factors will keep downward pressure on the Canadian unit making a drop to C$1.35 to the US dollar likely. Only a hike in interest rates will halt the Canadian unit's decline.

Against the deutschemark, the dollar held its ground as positive US economic data counteracted the negative effect of the unit's ''safe haven'' status fading on the stabilisation of Russian political problems. Investors rushed to buy dollars following the news that US August leading indicators rose by one per cent.

This data, combined with other upbeat figures, has increased confidence in the US economy. Investors will look for strong US employment figures, to be released on Friday, to confirm this more positive outlook.

Improving sentiment and the possibility of further problems in Russia will allow the dollar to test resistance at 1.64 deutschemarks. A break out could result in a rally to 1.66 deutschemarks.

The Australian dollar remains vulnerable on the downside although the unit appears to be establishing a floor just above 64 US cents. If Wednesday's release of Australian labour force data is disappointing then the Australian unit is likely to fall belowthis support level.

James Mitchell is an economist at BNP International Financial Services (HK)