By Fergal Smith
TORONTO (Reuters) - The Canadian dollar held near a three-month high on Tuesday as the market took in stride the prospect of a re-elected Liberal government, although some investors worried about the Liberals' need to rely on a left-leaning opposition party for support.
Canadian Prime Minister Justin Trudeau's Liberals are set to form a minority government after a tight election on Monday, with the latest tally from Elections Canada showing Liberals had won or were leading in 155 out of 338 seats.
A minority government leaves Trudeau in a weakened position and needing the support of a party such as the New Democrats (NDP) to push through key pieces of legislation.
"This is likely to exert drag on a Canadian dollar that might otherwise ride solid economic data, favorable interest rate differentials, and improving risk appetite higher," said Karl Schamotta, director global markets strategy at Cambridge Global Payments.
The Canadian dollar was trading nearly unchanged at 1.3082 to the U.S. dollar. The currency, which was boosted on Monday by signs of progress toward a resolution of the trade dispute between the United States and China, notched its strongest intraday level since July 22 at 1.3071.
The loonie has been the top-performing G10 currency this year, up more than 4% against the greenback.
The NDP has said it would increase corporate income tax rates and implement a wealth tax. It has also indicated its opposition to the expansion of a flagship oil pipeline, Trans Mountain.
"I expect limited stock market reaction on this outcome, energy stocks won't get any relief bounce on this news and should see a further deterioration in sentiment towards the space," Mike Archibald, associate portfolio manager at AGF Investments Inc.
The energy sector has the second largest weighting on Toronto's benchmark stock index <.GSPTSE> at about 16%.
"In this scenario, pipeline approval would likely have a tough time passing, putting further pressure on Canadian energy stocks," Archibald added.
Canada is the world's fourth-biggest producer of crude and the energy industry accounts for about 11% of annual nominal gross domestic product.
Still, the economy could get a boost from additional fiscal spending. Trudeau has said he would nearly double the deficit from C$14 billion ($10.7 billion) in the fiscal year that ended in March.
"This likely suggests no major changes in the economic outlook, although the minority government will impel them (the Liberals) to agree to some of the policy priorities of the NDP — pointing to somewhat looser fiscal policy," said Doug Porter, chief economist at BMO Capital Markets.
"We were likely headed in that direction in any event, based on the campaign pledges, but the minority situation will accentuate that trend."
(Reporting by Fergal Smith; Editing by Peter Cooney)