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IMF move highlights growing clout of Canadian dollar Add to ...

These are stories Report on Business is following Monday, Nov. 19, 2012.

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IMF highlights loonie
Buried in a recent International Monetary Fund report is a small paragraph with huge significance for the Canadian dollar.

The bottom line is that the IMF wants to break out the Canadian and Australian dollars when countries report their foreign exchange reserves.

Now, there are five key currencies in its report on the currency composition of official foreign exchange reserves, or COFER. The loonie, as the dollar coin is known in Canada, and the Australian currency are among the “others.”

A recent IMF survey showed that the “overwhelming proportion” of reserves are still held in the five key currencies, the U.S. dollar, the euro, Japan’s yen, Britain’s sterling and the Swiss franc.

Then there are 10 “other” currencies.

“Of these currencies, only two – the Australian dollar (AUD) and the Canadian dollar (CAD) – had more than two countries report holdings of their currency, and these currencies are to be considered for inclusion in COFER reporting,” the IMF document says.

“Any currency added to COFER reporting should meet the definition of a convertible currency that is freely usable for settlements of international transactions,” it adds. “Staff intends to repeat the currency range survey in around three years.”

The recommendation was made in August, and released late last week in an information notice.

What this means is that the two currencies are growing in importance as foreign exchange reserves climb.

Russia has started buying loonies, for example, while the Swiss National Bank says the Canadian currency now accounts for 4 per cent of its foreign exchange reserves.

“I think it just highlights how important Aussie and CAD have become,” said senior currency strategist Camilla Sutton of Bank of Nova Scotia, referring to the Canadian currency by its symbol.

“We’ve seen this for a couple of years now.”

Reserve managers, noted Ms. Sutton, are increasingly looking to diversify their holdings as their reserves swell, and “diversification is hard to find.”

Both Canada and Australia are advanced economies, fuelled by commodities, both are rated triple-A, and both have developed bond markets, she added.

The move by the IMF will do nothing to affect the value of the already strong loonie, but it does suggest that the inflow of foreign money into Canada will continue, thus supporting the currency, she said.

And while the stronger loonie suggests Canadian tourists will have more buying power should they be travelling outside the country, it also spells more trouble for the nation's exporters.

Markets rally
Global markets rallied today, buoyed by an optimistic tone on fiscal talks in the United States.

But troubles in Europe loom larger than America’s so-called fiscal cliff at this point, with finance ministers set to meet tomorrow to talk about Greece. Again.

President Barack Obama and congressional leaders all sounded the right note after meeting Friday to discuss avoiding the fiscal cliff, which refers to tax hikes and spending cuts that would automatically take effect Jan. 1 if no budget deal is reached.

The president backed this up on the weekend, telling reporters during a trip to Bangkok that he’s confident a deal will get done.

That has put some juice into global markets.

“With all the negativity in the markets last week the bears had been out in force, but on Monday morning they seem to have gone into hibernation,” said market Alastair McCaig of IG in London.

“Traders have a considerably more bullish outlook to life, buoyed by encouraging noises made by U.S. politicians over the weekend, which has  increased the belief that they will be able to resolve fiscal cliff issue before deadlines are reached.”

But tomorrow could look different.

Last week, at a meeting in Brussels, they agreed to give Athens an extra two years to meet its fiscal targets, though put off a decision on the next tranche of bailout money. That’s now scheduled to be decided tomorrow, and fresh in everyone’s minds will be the public split last week between Luxembourg’s Jean-Claude Juncker, the head of the finance ministers’ group, and International Monetary Fund chief Christine Lagarde, who opposed the extension.

“The governments and the IMF will sit down again this week to try to put together a package, with the IMF balking at the latest euroland proposals because it views them as unsustainable,” said chief economist Carl Weinberg of High Frequency Economics.

“So do we. Even if Greece’s woes are contained this week, Spain continues to face a cloud of doubt over its ability to avoid [a bailout package that would break the rescue fund],” he said in a research note.

“The fate of Italy’s government – and fiscal stability initiatives – is also in doubt. Risks are rising for year-end here.”

As well, for now the optimistic words from President Obama are just that.

“While the early signs of progress are encouraging there remains a long way to go in what will be a holiday shortened week for the U.S. ahead of Thanksgiving and the busiest shopping day of the year the day afterwards, Black Friday,” said senior analyst Michael Hewson of CMC Markets in Europe.

There are also warnings today on just how it all ends. As it now stands, running over the cliff is seen to hit the economy to the tune of more than $600-billion (U.S.).

Derek Holt of Bank of Nova Scotia said he believes a deal will be reached, but it won’t be anything that’s “kind to the economy or markets,” and thus today’s optimism is misplaced.

“I still think an agreement will be reached that avoids the most extreme aspects of the fiscal cliff, but not until the last minute following many theatrics over coming weeks that have yet to play out,” he said.

“An agreement that heads off the worst elements of the fiscal cliff by avoiding draconian sequestration cuts focused upon the defence lobby group is likely and that should rein in the over 4-per-cent hit to GDP that would have otherwise occurred,” he added in a research note.

“That still means, however, that U.S. taxes will rise through what is a likely end to the payroll tax cut that will lead to a retrenchment in Q1 personal disposable income, and a rise in at least some personal tax rates. Those twin policy changes could well, in turn, likely lead to a retrenchment in consumer spending that will be bearish for company earnings reports, in my opinion.”

BCE, Astral strike new deal
BCE Inc. and Astral Media Inc. have gone back to Canada’s broadcast regulator with a new takeover deal they hope will win approval this time, The Globe and Mail's Steve Ladurantaye reports.

“We heard Canadians and the CRTC loud and clear - they want assurance that Astral joining with Bell Media will directly benefit consumers and creators,” said BCE chief George Cope.

“We’re ready to deliver more choice for listeners and viewers, more opportunity for content creators, and more competition for the broadcasting industry. Bell and Astral are happy to move forward with a new proposal that benefits all Canadians, in both official languages, in communities large and small across the nation, with new ideas, new funding and new choices.”

BCE disclosed few details of the new agreement in a statement, though added it has withdrawn its request to the federal cabinet to direct the Canadian Radio-television and Telecommunications to support its proposed $3-billion takeover of Astral, which it rejected last time around.

“The new proposal to the CRTC by Astral and Bell addresses the commission’s concerns and sets out the steps the companies would take to comply with the relevant viewership thresholds,” the companies said.

“The proposal also includes a revised package of tangible benefits to support the creation of exceptional Canadian TV and radio content, promote homegrown talent in a multi-platform universe, and foster consumer engagement in the broadcasting system.”

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