Loonie stuck in global chokehold: CIBC

Mark Carney, governor of the Bank of Canada, warned of a "death grip" on the U.S. dollar this week, but the Canadian dollar is also in a choke hold of its own, the chief economist with CIBC World Markets said in a report Friday. One way to break it would be for the Bank of Canada to “fight fire with fire” by intervening to sell loonies in the foreign exchange markets, in an effort to weaken the currency, Avery Shenfeld said.

Mr. Shenfeld highlighted two factors that have kept the loonie buoyant.

The first is more incidental than anything, with the loonie getting a relative lift as a byproduct of all the greenback purchases that U.S. trade partners have been making to devalue their currencies — the "death grip" Mr. Carney warned about.

More importantly, though, is the general interest foreign banks have had in the Canadian dollar over the past year. "Reasonable decisions by central banks to diversify their reserve holdings, including added weight in Canadian dollars, may have been a key factor in driving our currency to parity vs. the U.S. unit, offsetting a large trade deficit," Mr. Shenfeld said.

This is a problem for Mr. Carney, as the elevated loonie is preventing him from raising interest rates to curb rising household debt for fear of sending the dollar even higher and further curbing exports.
Instead, Canada could "fight fire with fire" by doing some currency intervention of its own, selling off an equivalent volume of loonies.

"That would simply move back to market-determined exchange rates, and loosen the death grip," Mr. Shenfeld said. "Just a thought."

Foreigners bought more than $72-billion in Canadian dollar bonds this past year, largely through Government of Canada issues.
Mr. Shenfeld estimates central banks might have accounted for as much as half of all net new foreign buying.
However, trade flows between Canada and most countries other than the United States is modest enough that it is unlikely any particular country would try to actively control their currency's cross with the loonie to the same level as the greenback."Nor are they directly aiming at driving the loonie against the U.S. unit, but that is still the outcome," he said.

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