BoC set to act on high dollar

[omagh]

Looks like the Cdn/US dollar arbitrage may be ending...

 

http://www.theglobeandmail.com/report-on-business/carney-set-to-act-on-high-dollar/article1229193/

 

-O

[arbitragr]

Most countries whose economy is tied to commodities in some way, currently has their currency trending higher against the US$.

[Uccmal]

The only way the Can. gov't has ever got that currency moving is by Jawboning it.  They tried to raise it in the mid 90s and nothing happened. 

[Guest Broxburnboy]

Traditiionally, the BofC has  manipulated the exchange rate by lowering or raising CDN interest rates to maintain demand for Canadian (particularly manufactured goods) exports. That ploy is no longer available as there is no further room on downside for interest rates.

In a misguided attempt (contrary to the actions of a free market) to keep the loonie low, we will now see currency dillution (through deficits) and purchase of US government debt. It is also interesting to note that the newest primary dealers in Treasury debt are branches of the TD and RBC... another way of bolstering the US buck through loonie based purchases.

Alas, like other sovereign holders of US debt, we will increasingly take a loss on these holdings as the purchasing power of the USD continues to deteriorate.

[Smazz]

I hope they dont do as fine a job as last time ::)

[SharperDingaan]

 

He doesn’t necessarily need to sell CAD & buy USD.

 

The smart way to ‘quantitatively ease’ is to fund something massive (ie: nation-wide state-of-the-art green energy infrastructure, buried & super-cooled electric transmission lines, replacement of the power grid, etc.). Very big $ commitments too big for any one or group of provinces, a clear & lasting national interest, & spending sizeable enough to have a material impact on inflation. Then bear in mind that the BOC is legally required to maintain inflation at an orderly rate, would be paying roughly 2% of GDP/year in newly printed CAD notes, & that only the BOC is in a position to control the inflation. No wonder the governor is smiling.

 

No one is going to want to buy CAD unless they have to pay for something, which will drop the currency in a big way - & keep it there. A CAD manufacturer is also not going to export without a solid LC backing the receivable, as he can divert production domestically. 

 

Unlike depreciation this is building real & long-term assets, & Canada ends up with both a stronger economy & currency.

 

Very elegant.

 

SD

 

 

[Guest Broxburnboy]

Running a deficit is not necessarily bad for the loonie, although the loonie has obviously benefited from the opposite condition..years of government surplus. It depends if the borrowed funds are spent in a manner to increase aggregate national wealth (which ultimately supports fiat currencies).

So wealth creating or efficiency building national projects are the logical way to stimulate a stagnant economy. If the stimulus funds are malinvested, particularly if they are malinvested abroad, then national wealth decreases and the purchasing power of the loonie eroded.

Theoretically the worst investments would be foreign wars (like our participation in Afghanistan). Here is an investment which is a national wealth destructor  from day one and going forward only produces more balance sheet losses. As time goes on, the benefits claimed are overwhelmed by the ongoing losses. Throughout history, empires have fallen on the inability to pay for past wars. Any other investment that is likely to lose money (such as propping up GM) tends to erode the value of the loonie.

The USA  is pursuing policies that weaken the purchasing power of the US buck abroad. This should result in closing its foreign trade gap and the repatriation of jobs it has lost to foreigners, although foreigners (including Canada) are trying to maintain their foreign trade surpluses by out-devaluing the USD in a mutually destructive race to the bottom.

The fact is that the loonie, all else being equal, would tend to rise against the USD. BofC monetary policy manipulations to seriously counter this natural trend can only be at the expense of decreased national wealth.