BOTH the Canadian dollar and Canadian bonds were much stronger Oct. 31 with news of the narrow victory of the federalist forces in the Quebec referendum on independence. But hanging over markets and the Canadian economy is a threat of further constitutional turmoil, even the possibility of another referendum before the end of this decade.
"It's a good result for international markets. It means no one has to make any hard decisions about dumping their Canadian holdings," says Rufus Gilday, an international bond trader at a bank in London.
Canadian bond prices moved higher after the news, suggesting that Canadian interest rates could come down as much as 1 percent later this week.
"The Bank of Canada will start to ease interest rates, driving them down significantly," says Sherry Cooper, an economist at Nesbitt Burns in Toronto. "We see a resumption of economic growth in Canada as a result of the 'No' victory," she says.
The Canadian dollar was trading Oct. 31 at around 74.6 American cents, up a cent from Oct. 30's close of 73.58 cents. The Toronto stock market also rose sharply in the morning on Oct. 31.
But while markets may have moved on the Quebec referendum news, many economists and political leaders say the long-term outlook for Canada will be clouded by a continuing squabble over the constitution and Quebec's place within, or outside, Canada.
"It means we have stagnation instead of contraction in the economy," says William Watson, a professor of economics at McGill University in Montreal. "It will mean interest rates will stay higher than they should be, and the Canadian dollar will stay lower than it should be."
Mr. Watson points out that there is still a separatist government in Quebec, and under Quebec electoral law they do not have to call an election until September 1999.
On Oct. 30, after the vote was announced, separatist leaders in Quebec said the close vote told them they could try again soon.
"Canada is still a country but only on paper," says Louise Beaudoin, minister of intergovernmental affairs.
"The next time will be the right time," adds Lucien Bouchard, leader of the separatist campaign. "One way or the other we're going to live with uncertainty for a very long time," says Brian Neysmith of the Canadian Bond Rating Service.
Ms. Cooper says markets hope the constitutional crisis won't be too disruptive.
In Ottawa, the surprisingly strong showing of the separatist side will mean trouble for the federal government's economic agenda of reducing the budget deficit and cutting costs.
"It's going to be hard for the federal government to bring in a budget to deal with the deficit," says McGill economist William Watson. "The government is going to be preoccupied with dealing with the constitution, something [Prime Minister Jean] Chretien said he did not want to do."