27 July 2009

Stronger loonie no friend of recovery

The following is excerpted from the 27 July 2009 edition of “globeandmail.com”

The Canadian dollar ... hit a 10-month high Monday, fuelling fears the rapid rise will hamper Canada's fragile economic recovery.

Higher commodity prices, rising equity markets and a weak U.S. dollar helped send the loonie to 92.5 cents (U.S.) in early trading.

“The Canadian dollar is probably strengthening too rapidly for the economic fundamentals to play catch-up in the near term. It's starting to cause some beads of sweat,” Bank of Nova Scotia currency analyst Sacha Tihanyi said in an interview.

“Our exporters are still under pressure … so it's definitely a negative at this point,” said Mr. Tihanyi, noting that the Bank of Canada has expressed concern that the rising loonie could constrain growth but has opted not to intervene at this point….

Last Thursday, Bank of Canada Governor Mark Carney said the recession is over in Canada and the economy is in the early stages of recovery. However, he also said he is prepared to intervene in currency markets if the Canadian dollar's rise persists and threatens to smother the “nascent” recovery.

The Canadian central bank has not intervened in currency markets since 1998, and has a stated policy to do so only in extreme circumstances….

Mr. Tihanyi said the central bank appears to be “staying its hand” for now, but if the loonie continues its trajectory toward parity, a 95-cent Canadian dollar would likely be “the pain point” that forces the Bank of Canada to intervene if overall economic growth continues to lag….

Such intervention could be in the form of quantitative easing, which dilutes the value of the currency by increasing money supply – although Canada would face pressure from other industrialized nations if it took deliberate steps to devalue the currency and give Canadian exporters a trade advantage….