As the Canadian dollar continues to flirt with parity, Avery Shenfeld of CIBC World Markets suggests that the Bank of Canada intervene in markets to hold the currency down.
The central bank hasn't intervened in currency markets for many years, and in the past, Mr. Shenfeld recalls, it was to prop up the loonie when it was in its death throes, rather than trying to clip its wings.
Now, Govenor Mark Carney is dealing with a recovery that is slowing, partly because of flagging U.S. demand, but also because the stronger dollar is eroding Canada's export competitiveness by making goods more expensive outside the country. At the same time, he wants Canadians to stop gorging on debt, but he has to keep interest rates low for economic reasons.
"He would like to raise interest rates to slow household debt accumulation," Mr. Shenfeld said in a report today. "For now, he can't do so for fear of sending the loonie soaring, and adding to the existing drag on exports."
But, he noted, a weapon that remains is "fighting fire with fire."
"Canada could match foreign central bank intervention in favour of our currency with an offsetting intervention, selling an equivalent volume of loonies," Mr. Shenfeld said. "That would simply move back to market-determined exchange rates, and would loosen the death grip on the Canadian dollar. Just a thought."
In an interview, Mr. Shenfeld added that he's not predicting Mr. Carney will take such action, just that he should. By selling Canadian dollars and helping to dampen its strength, a case could be made.
The dollar has been high partly because of Canada's economic outlook and its fiscal standing compared to other countries. That has brought a flood of foreign money into Canada.
Several countries are now managing their exchange rates amid a currency cold war, for want of a better phrase, sparking much controversy.
"Going to school on the lessons from the past crisis, global policy makers are moving towards financial sector reforms, while a second source of those troubles, an imbalance in trade tied to misaligned currencies, is getting less action" Mr. Shenfeld said.
"Bank of Canada Governor Carney warned of a 'death grip' on the U.S. dollar, with over 40 per cent of America's trade now with countries with managed exchange rates against the greenback, and more than a dozen countries seeing double-digit growth in their reserves as they control those rates."
But the loonie may also be in a death grip of its own, he said.
"Anything that elevates the greenback against overseas economies is titlting Canada's cross against those same markets, and affecting our trade balance as a consequence."Report Typo/Error