Thursday, October 29th, 2009
Canadian central banker, Mark Carney’s concerns about the strong Loonie are well known. It threatens Canada’s economic recovery. Some currency analysts believe the Canadian dollar could test its $1.10 highs again. But what is Carney doing about it?
David Rosenberg says we should embrace this period in Canada’s economic history. “For its part, the Bank of Canada has said that “persistent strength in the Canadian dollar” is going to “slow growth and subdue inflation pressures.” So, in return for softer growth, what we get back is lower “inflation pressures.” The winner here is anyone who needs to borrow money – a strong loonie will prevent the Band of Canada from taking the interest-rate punchbowl away any time soon.”
But, last week, the Bank of Canada interrupted the Canadian dollar’s ascent when it left rates at 0.25%, and downgraded economic growth prospects for 2010 and 2011. The dollar lost 2 cents. There is pressure though for the BoC to ease further.
Carney’s wait-and-see stance on quantitative intervention, indicates he may not have to. Instead, he may be talking through this, while waiting for the G20 to sort out the US dollar; in effect, a policy of benign neglect.
At the G-20 meeting in Pittsburgh in late September, leaders made commitments to pursue policies to bring the world into greater economic balance. Following that meeting, the ECB’s Trichet said it is “extremely important” that U.S. authorities pursue policies supporting a strong dollar, and that excessive foreign-exchange volatility is an “enemy.”
There’s another G20 meeting scheduled for Nov. 6-7 in Scotland, and it’s most likely to serve as a forum where all concerns over the dollar’s weakness will be aired. “I think there will be fireworks at the G20,” said Stephen Jen, a well-respected currencies investor at hedge fund BlueGold Capital Management in London.
The US is wallowing in the advantage of a weaker dollar. Neil Mellor, Bank of New York currency analyst, says, “You can’t continue down this road without something giving way, and it’s clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy.”
US$450-billion has been sucked from money market funds (the dollar) into risky assets since March. Zero-percent-interest-rate policy (ZIRP) crowded investors out of the money market and into risky assets. In the simplest of terms, the global equity markets’ slingshot recovery has led to conversely rapid devaluation of the dollar.
Now, a “strong US dollar policy,” for which there is great political will globally, appears to hinge upon a reversal of fortune in markets or concerted monetary intervention via the IMF, or both.
Therefore, the price of relief from the Loonie’s climb could be a synchronized decline in commodity prices and equity markets, in the near term. The repatriation of cash to US money markets means a stronger US dollar, and thus a weaker Canadian dollar, hence the synchronization with the reversal in equity markets and commodities prices. Perhaps Carney is right to let the big players sort out and tighten the US Dollar.
In newer developments earlier this week, the US government, perhaps under some pressure, showed signs that it is willing to withdraw stimulus, thus tightening the Greenback, by closing down the housing tax credit, and calling on Bank of America to repay its bailout by selling shares. The market is reacting poorly.
It begs the question – Is the tail wagging the dog?
If the stimulus and zero interest rate policy is responsible for the markets’ huge recovery, then what effect will indications now, of the US government’s willingness to withdraw stimulus, have?
Either way, it would be prudent, at this point, to take the political pressure from the world’s other large economies to re-establish balance without jeopardizing their own recoveries, seriously.
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