Only eight years ago, the loonie was flying on just one wing and a prayer when then finance minister Paul Martin and Bank of Canada governor David Dodge pitched the currency on a U.S. road show, claiming it was worth more than its lowly 62 cents (U.S.).
Today, it’s perched atop global currency markets as Canada wins acclaim for its economic outlook and handling of the public debt, a point driven home Wednesday when a Russian Central Bank official confirmed that the Canadian dollar would be added to its international reserves.
While foreign interest in the loonie bodes well for Canadians who shop south of the border, it will also jolt Canada’s fixed-income markets as reserve managers buy liquid debt securities with the Canadian dollars they own. And as additional countries pile into the loonie, it will only add incentive for more central banks to increase their holdings.
“I wouldn’t be surprised to see more interest in Canadian dollar reserves,” said Dan Katzive, director of foreign exchange strategy at Credit Suisse in New York. “Reserve managers have accumulated too many [U.S.] dollars, they have never liked the yen, they are maybe a bit less keen on the euro than they have been in the past, and the sterling has its own potential issues.”
Canada is one of the few developed countries to have successfully absorbed new stimulus debt, and last month became the first Group of Eight member to raise interest rates coming out of the recession. This strength has not gone unnoticed.
Canadian fiscal and monetary policy “continues to suggest the making of a reserve currency,” said a recent BNP Paribas SA report. And on Friday, a UBS report suggested the dollar could be included in the calculation of the International Monetary Fund’s special drawing rights (SDR), its unit of accounting, over the next decade. Currently, the SDR value is determined by a weighted average of the U.S. dollar, euro, yen and British pound.
