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The Globe and Mail

Canada’s resilience has foreign central banks loading up on loonies

Demand for Canadian dollars is coming mainly from emerging economies, not advanced economies, who still prefer the traditional reserve currencies – the U.S. dollar, euro, Japanese yen, British pound and Swiss franc.


Attracted by Canada's economic resilience during the financial crisis, Canadian dollar-denominated bonds have become a fixture of foreign central bank reserves.

Foreign central banks now hold roughly $200-billion (U.S.) worth of Canadian dollar debt, representing about 1.8 per cent of the $11-trillion in official foreign reserves worldwide, according to a Bank of Canada study released Tuesday.

Demand for Canadian dollars is coming mainly from emerging economies, not advanced economies, who still prefer the traditional reserve currencies – the U.S. dollar, euro, Japanese yen, British pound and Swiss franc.

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"This may be a conservative estimate of the official foreign demand for Canadian assets, since most of the growth in reserves is expected to come from emerging economies, which allocate a higher weight to the Canadian currency than advanced countries," said the report, contained in the spring issue of the Bank of Canada Review.

The central banks of Chile, the Czech Republic, Russia, Iceland and Macedonia are all known to have added Canadian dollars to their reserves in recent years.

The $200-billion estimate is substantially higher than the $112.5-billion of Canadian-dollar official reserve holdings reported by the International Monetary Fund for the third quarter of 2013.

That's because the IMF estimate is based on a survey of central bank fund managers who control just 54 per cent global central bank reserves. Add in all central banks, and the total Canadian dollar holdings could range from $172-billion to as high as $219-billion, the report said.

And because emerging economies appear to be more attracted to Canadian dollars than advanced economies, that figure is expected to grow in the coming years.

If global reserves grow by one per cent annually, another $2-billion would flow into Canadian dollar bonds every year, according to the report by Bank of Canada officials Lukasz Pomorski, Francisco Rivadeneyra and Eric Wolfe.

The lure of the Canadian dollar has positive and negative effects. Higher foreign demand raises Canadian bond prices, and lowers yields, thereby reducing the federal government's borrowing costs.

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But because most central banks are patient, long-term investors, it also decreases market liquidity for those bonds.

The Canadian dollar isn't the only currency attracting the attention of central banks. The share of foreign reserves put into non-traditional currencies has more than tripled since the financial crisis to 6.3 per cent of total reserves.

Of those, the Canadian and Australian dollars are the most widely held.

Interest in those currencies took off in the second half of 2009, according to the report.

In the Canadian dollar's case, the attraction is a "clear reflection of Canada's relative economic resilience during the global financial crisis of 2007-09," the report said.

A second study in the Bank of Canada Review concludes that the official jobless rates in Canada and the U.S. may have exaggerated the improving labour market since the recession.

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The study's authors – bank officials Konrad Zmitrowicz and Mikael Khan – argue that the falling unemployment rate may have "modestly overstated" recent improvements in Canada and "significantly overstated" the health of the U.S. jobs market.

The authors said policy makers should be looking at a much broader range of labour market statistics than just the unemployment rate, such as long-term unemployment, the labour force participation rate and wage growth.

Canada's unemployment rate stood at 6.9 per in April, down from a peak of 8.7 per cent in August, 2009. In the U.S., the jobless rate was 6.3 per cent last month, down from a high of 10 per cent in October, 2008.

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