The Canadian Dollar fell from parity with the US Dollar in July 2008. For a minute, it looked as though it would return to that mark in October 2009. Alas, it was not to be, as the currency that had risen 20% since March wasn’t able to rise another 3% to close the elusive gap that would once again bring it face-to-face with the Greenback.The Loonie’s rise was not difficult to understand. Soaring commodity prices and the fact that the economic recession was milder in Canada than in other economies drove the perception that Canada was a good place to invest. Despite a surging budget deficit and weak domestic consumption, investors bought into this notion. The weak Dollar and rising risk aversion reinforced this perception, and as investors accepted that parity was inevitable, hot money poured in and the Loonie’s rise became self-fulfilling.
That was until Mark Carney, head of the Bank of Canada, used the strongest rhetoric to-date in discussing the possibility of intervention. For the first time in this cycle, the markets took the hint, and sent the Canadian Dollar down by the largest single-day margin in months. “Markets should take seriously our determination to set policy to achieve the inflation target. Markets sometimes lose their focus, we don’t lose our focus,” he said firmly, adding that forex intervention is “always an option.”
Intervention is supported both by economic data, and other Canadian institutions. According to one estimate, every 1 cent increase in the Loonie against the Greenback costs the county $2 Billion in export revenue and 25,000 jobs. The chief economist for CIBC, meanwhile, has warned that many companies are in the process of making long-term direct investment decisions, and could be discouraged from locating in Canada because of perceptions that its currency will remain strong for the immediate future: “If the loonie is overvalued for a few years, we may be sacrificing business plant and equipment on the altar of a strong currency.” He also compared the predicament facing the Bank of Canada to that facing the Royal Bank of Switzerland, which ultimately and successfully intervened on behalf of the Franc. Intervention on behalf of the Loonie, he argued, could be undertaken under the umbrella of fighting speculation and irrational movements in currency markets.
Prior to this outburst, investors had basically concluded that the BOC wasn’t prepared to put its money where its mouth was, so to speak. “The central bank’s shot across the bow has definitely subsided. There’s not much they can do,” summarized one analyst a few weeks ago. The term “jawboning” had become the preference of columnists and investors when discussing the resolve of the BOC. The belief was that the BOC had concluded that intervention was essentially a futile proposition (based on its failed efforts in the late 1990’s), and that it would instead resort to making idle threats.
That was until Mark Carney, head of the Bank of Canada, used the strongest rhetoric to-date in discussing the possibility of intervention. For the first time in this cycle, the markets took the hint, and sent the Canadian Dollar down by the largest single-day margin in months. “Markets should take seriously our determination to set policy to achieve the inflation target. Markets sometimes lose their focus, we don’t lose our focus,” he said firmly, adding that forex intervention is “always an option.”
Intervention is supported both by economic data, and other Canadian institutions. According to one estimate, every 1 cent increase in the Loonie against the Greenback costs the county $2 Billion in export revenue and 25,000 jobs. The chief economist for CIBC, meanwhile, has warned that many companies are in the process of making long-term direct investment decisions, and could be discouraged from locating in Canada because of perceptions that its currency will remain strong for the immediate future: “If the loonie is overvalued for a few years, we may be sacrificing business plant and equipment on the altar of a strong currency.” He also compared the predicament facing the Bank of Canada to that facing the Royal Bank of Switzerland, which ultimately and successfully intervened on behalf of the Franc. Intervention on behalf of the Loonie, he argued, could be undertaken under the umbrella of fighting speculation and irrational movements in currency markets.
Prior to this outburst, investors had basically concluded that the BOC wasn’t prepared to put its money where its mouth was, so to speak. “The central bank’s shot across the bow has definitely subsided. There’s not much they can do,” summarized one analyst a few weeks ago. The term “jawboning” had become the preference of columnists and investors when discussing the resolve of the BOC. The belief was that the BOC had concluded that intervention was essentially a futile proposition (based on its failed efforts in the late 1990’s), and that it would instead resort to making idle threats.
sooooo sweeeeet
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