The Bank of Canada may want to sell Canadian dollars to temper gains driven by purchases by other central banks, said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce.
The dollar’s strength undermines Carney’s ability to raise interest rates to slow increasing household debt levels, Shenfeld said in the report, saying further gains in the country’s currency may slow growth. Governor Mark Carney left the bank’s key interest rate at 1 percent for a second meeting Dec. 7 and said weak exports cut growth in the second half of this year.
“There is one weapon yet to be touched: fighting fire with fire,” Shenfeld said in a report today. “Canada could match foreign central bank intervention in favor of our currency with an offsetting intervention, selling an equivalent volume of loonies.”
Canada hasn’t done transactions in the currency market to influence the country’s exchange rate since 1998, a period that includes moves to a record low and a record high. The central bank’s policy restricts intervention to cases where foreign exchange markets break down or when currency movements “seriously threatened” long-term economic growth, according to its website.
The Canadian dollar slid 0.6 percent to C$1.0119 per U.S. dollar at 11:05 a.m. in Toronto, from C$1.0061 yesterday. One Canadian dollar buys 98.82 U.S. cents. The Canadian dollar has gained 25 percent against the U.S. dollar since March 2009.
Carney told lawmakers in October that unilateral action in currency markets “seldom works.” He also said that intervention remained a possibility if there was a serious threat to the economy from global currency “tensions.”
The central bank and government “maintain considerable options to control the situation if that is necessary,” Carney told members of the Commons Finance Committee Oct. 26. “We have to observe persistent strength in the Canadian dollar, which has the potential to seriously influence Canadian economic growth.”
Russia’s central bank last month said it started adding the Canadian dollar to its international reserves. The share of Canadian dollars in Russia’s international reserves, the world’s third biggest, may reach between 1 percent and 2 percent, central bank Chairman Sergey Ignatiev said Dec. 8.
“Intervention was not likely earlier this year and is very unlikely now,” Shaun Osborne, chief currency strategist in Toronto at Toronto Dominion Bank’s TD Securities unit, wrote in an e-mail. “Inflows into the Canadian dollar have been running at very high levels for some time.”
“The lesson from the likes of the Swiss National Bank and the Bank of Japan this year is that you have to intervene in a very significant way and even then, a positive result is not guaranteed,” Osborne said.
Finance Minister Jim Flaherty, who would need to approve any foreign exchange intervention, said in January that central bank purchases of Canadian dollars reflects his country’s strong fiscal position and “substantial” pressure on the U.S. currency to depreciate.
“Investments by other central banks in Canadian securities and the Canadian currency is a recognition of the fiscal health, relatively speaking, of Canada, which is strong,” Flaherty told reporters. “There’s downward pressure on the U.S. dollar, which results in upward pressure on other market currencies.”