Canadian Election Outlook: How Pension Shifts and Policy Could Reshape the CAD

As Canada’s federal election nears, investors are scrutinizing how the political outcome could reshape capital flows and exchange rates. A recent UBS analysis highlights a critical pivot point: Canadian pension funds, holding roughly CAD 1.1 trillion in U.S. dollar-denominated assets, may begin repatriating capital amid weakening returns and shifting policy priorities. This reallocation, coupled with Liberal Party proposals for domestic investment incentives, could catalyze a fundamental revaluation of the Canadian dollar (CAD) against the U.S. dollar (USD).

Pension Funds at a Crossroads

Canadian pension funds have long leaned heavily into U.S. assets, with 47% of top funds’ portfolios allocated to USD-denominated holdings. Low hedging levels—just 16% of USD exposure is protected—have left these institutions vulnerable to volatility. Recent trends are exacerbating the problem: the CAD has risen 5% year-to-date, while U.S. equities have declined. This combination has amplified portfolio losses, undermining the diversification benefits once assumed.

UBS Global FX Strategist Vassili Serebriakov argues that even modest adjustments—such as a 10 percentage point reduction in USD allocations or increased hedging—could drive massive CAD demand. Such shifts could double Canada’s balance of payments portfolio investment surplus, as pensions rebalance toward domestic assets.

Political Momentum for Domestic Capital

The Liberal Party’s platform, led by potential Prime Minister Mark Carney, emphasizes policies to retain capital within Canada. Proposals include relaxing the “30% rule” limiting equity holdings and promoting “Buy and Invest in Canada” initiatives. These measures align with a broader trend of economic nationalism, akin to post-election Germany’s shift toward inward-focused capital allocation.

A Carney-led Liberal victory would likely accelerate this trend, prioritizing infrastructure, housing, and R&D investments. Conversely, a Conservative win under Pierre Poilievre could introduce trade-related volatility, though UBS notes structural advantages from pension reallocations may dominate regardless.

Technical and Policy Tailwinds for the CAD

Beyond capital flows, technical factors favor the CAD. The Federal Reserve’s potential pause in rate hikes reduces USD demand, while Canada’s improving trade balance—projected to grow by CAD 20 billion in 2024—bolsters fundamentals. UBS’s Serebriakov anticipates USD/CAD could test support levels of 1.3700, with a sustained downward bias if Carney’s policies take hold.

The strategist also recommends shorting GBP/CAD, citing strong domestic capital inflows and the Liberal government’s pro-CAD stance. This trade leverages Canada’s economic stability and the U.K.’s persistent inflation challenges.

Conclusion: A Structural Turn for the CAD

The Canadian election represents a pivotal moment for the CAD’s valuation. With CAD 1.1 trillion in USD assets primed for repatriation and policy shifts incentivizing domestic investment, the currency’s appreciation trajectory is gaining momentum. UBS’s analysis underscores that even a modest 10% reallocation from USD holdings could add CAD 110 billion to domestic capital flows—a force large enough to reshape exchange rate dynamics.

Political risks remain, but the structural case for the CAD is compelling. A Liberal victory would likely solidify this trend, while even a Conservative win may struggle to counteract the pension reallocation wave. As the USD/CAD pair tests critical lows, investors should prepare for a Canadian dollar increasingly unshackled from its historical USD dependency. The loonie’s ascent is no longer just a technical play—it’s a story of capital realignment, policy direction, and a currency poised to reflect Canada’s economic renaissance.