Uncertainty surrounding federal elections in Canada and the United States could spell weakness in stocks, strength in bonds, and more selling in the U.S. dollar, say economists at TD Bank Financial Group.

Neither election is a slam dunk for the incumbents. TD notes that in Canada, some recent polls suggest the possibility of a minority government. “On the U.S. side, President Bush is also facing strong headwinds. … In sum, there is uncertainty in both elections, and investors do not like uncertainty.”

In the U.S., the odds are heavily tilted towards another round of U.S. dollar weakness as the campaign shifts into high gear, TD predicts. “The campaign is bound to refocus the markets’ attention on the country’s massive fiscal and international current account deficits,” TD predicts, saying that the U.S. current account deficit “is quite simply not sustainable over the longer haul”.

TD says that once the markets start to refocus their sights towards the country’s fiscal issues, the greenback could be in for a dip. And, the market’s perception of John Kerry’s views on free trade, likely leading to fears of mounting protectionism “can only play against the U.S dollar”.

According to TD, investor uncertainty will weigh on equities and favour bonds.

“In Canada, the issue will be the policy uncertainty that could result from a minority government,” TD says. “That could favour the safety of bonds over equities. But, in all likelihood, any impact from the election would be very short-lived — little more than a knee-jerk reaction immediately after the vote.”

“No matter who takes over the reins, budget deficits are not an option ­ and that has been a key factor for the markets in the past. Moreover, Canada is running current account surpluses, and is therefore no longer as vulnerable to the whims of foreign investors as it was so often during the tumultuous years of the early 1990s,” TD says, noting that a minority government would not come as a surprise to the markets.