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Canadian dollar’s rise as a reserve currency may stall as ‘golden age’ passes

Briefing highlights

  • Loonie's reserve currency rise may stall
  • Global markets on the rise
  • GM becomes Trump's latest target
  • Ford cancels plans for Mexican plant
  • Trump picks China critic for trade rep
Loonie's share of global foreign exchange reserves

The Canadian dollar’s rise as a reserve currency may be stalling with what appears to be the passing of a “golden age.”

The loonie has enjoyed its status since joining the International Monetary Fund’s elite list of reserve currencies, its share of the global pie inching up bit by bit over the past few years.

It’s the fifth most widely held reserve currency among the world’s central banks, well behind the U.S. dollar, the euro, Britain’s pound and the yen, and just ahead of the Australian dollar.

According to the latest report from the IMF, global central bank holdings of the Canadian dollar rose to $156.3-billion (U.S.) in the third quarter of 2016, up more than 8 per cent from the previous three-month period.

Consider that two years earlier, those holdings stood at $120-billion in the IMF’s Currency Composition of Foreign Exchange Reserves, or COFER, report.

Notably, too, the share of Canada’s currency in central bank reserves inched up to 2 per cent in the third quarter from 1.92 per cent in the second.

The loonie’s share stood at 1.94 per cent in the third quarter of 2014, though slipped to as low as 1.83 per cent in early 2015.

But the latest level may be about as far as it goes, said Shaun Osborne, Bank of Nova Scotia’s chief foreign exchange strategist, adding that the rise of the loonie in last Friday’s IMF numbers, which are expressed in U.S. dollars, may have had more to do with currency fluctuations.

“The USD-denominated share of CAD reserves rose by about 2 per cent in the COFER data, and that is about as much (fractionally less, to be more precise) as the USD rose against the CAD through Q3,” Mr. Osborne said, referring to the Canadian and U.S. currencies by their symbols.

“Without more details, we will never know what drove the increase but it looks like a valuation effect, certainly for the most part, in my opinion.”

Not only that, in general “the ‘golden age’ of reserve accumulation (by the likes of China, etc.) seems to have passed,” Mr. Osborne added.

Total reserves now stand at about $11-trillion, up marginally from the second quarter and down from almost $12-trillion two years ago.

“The CAD may still see some marginal inflows from reserve asset managers in the future but with the USD still strengthening and reserves in the developing market space stable or declining, there is unlikely to be much additional interest in the CAD for the moment.”

As for the value of the loonie, which is hovering at about 74.5 cents, most analysts believe it will sink further, to around 72 cents or even below the 70-cent mark, largely because of the diverging paths of interest rates in Canada and the United States.

The Bank of Canada is expected to hold its benchmark overnight rate steady while the Federal Reserve raises its key rate again.

And, as always, much depends on the price of oil.

“For CAD, the outlook is consistent with continued policy divergence and limited support from oil prices, keeping USDCAD in a 1.35-to-1.40 range,” Mark McCormick, North American head of foreign exchange strategy at TD Securities, said in a recent outlook.‎

Looking at it in reverse, that means he expects the loonie to trade against the U.S. dollar at between about 71.5 and 74 cents.

“We maintain the view that with oil prices structurally lower and Canada’s current account deficit unresponsive to recent exchange rate weakness, CAD remains overvalued and should continue its decline,” Mr. McCormick said.

Stocks on rise

For those just returning, welcome back to what’s shaping up as a nice kick-off.

Global markets are on the rise, with North America kicking off 2017 in fine fashion.

“This week will see markets kick back into life, with the usual fanfare surrounding Friday’s U.S. jobs report,” said IG market analyst Joshua Mahony.

“However, we appear to be approaching a period of stability for U.S. and European monetary policy, leaving us to focus on the political and fiscal side of things,” he added.

“There is no doubt that Trump’s inauguration will represent a major milestone for the month, yet amid talk of London bankers moving to France, the real threat is that we will begin to see the real impact of Brexit start to emerge in Q1.”

Trump in spat with GM

General Motors has become Donald Trump’s latest target, saying today that the president-elect is off-base on its Mexican operations.

Mr. Trump threatened GM with a “big border tax,” saying the auto maker is manufacturing some of the Chevrolet Cruze cars it sells in the U.S. in Mexico.

GM responded to Mr. Trump’s tweet with a news release suggesting there’s no real issue here.

“All Chevrolet Cruze sedans sold in the U.S. are built in GM’s assembly plant in Lordstown, Ohio,” the auto maker said.

“GM builds the Chevrolet Cruze hatchback for global markets in Mexico, with a small number sold in the U.S.”

Within a few hours, Ford also announced it's killing plans for a Mexican plant, saying it will invest hundreds of millions of dollars in Michigan.

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