BoC To Curb Rise Of Canadian Dollar

The Bank of Canada suggested it could purchase government securities/treasuries in the open market to lower borrowing rates further, and curb the rise of the Canadian dollar if it continues to rise. There is a strong possibility that the currency’s strength would hamper economic growth and delay recovery. Such a move is referred to as quantitative easing. It is something the US Federal Reserve has already been doing, and has the effect of reducing the currency’s appeal since the government is essentially printing money (deflating the value of the currency).

While the Fed mainly used this tool to stimulate borrowing (and ultimately growth) and not to keep the US dollar down, the BoC is focused on keeping the value of the dollar from rising to allow the growth to continue. The effects are the same, but the reasons are slightly different. Canada’s lower currency has allowed exports to be competitive, while an increase in the currency would make Canadian products and services much more expensive. We have already seen the negative economic impact on businesses and trade, back in 2008 when the Canadian dollar rose to and was on par with the US dollar.

The Bank of Canada’s benchmark interest rate is already 0.25%, and although it has indicated it would prefer to avoid quantitative easing measures, it would rather do that than to go with direct currency intervention. Direct currency intervention would mean selling the currency in order to push its value down in favour of the US dollar, as the Swiss National Bank has done earlier in the year with the franc. However, direct intervention is not looked upon favorably among the G8, especially since they have criticized China for direct currency interventionism / controls while arguing for free markets.

The negative side of quantitative easing, is high inflation later on. By keeping the dollar low, they are also trying to ensure growth and inflation (normal controllable levels inflation), and also avoid a deflationary situation as well. A deflationary situation is considered much worse.

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Related articles with a more detailed discussion of the underlying issues and implications:

Implications of The Federal Reserve’s Purchase of Treasuries

How The Financial Crisis Will Affect The US Dollar, Inflation, Gold, and Oil Prices

Q&A: Long Term vs Short Term Treasuries, Spread, The Fed, Interest Rates

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2 thoughts on “BoC To Curb Rise Of Canadian Dollar

  1. I think the game theory aspect is very much alive here. All of the resource-rich exporter nations will have to intervene to keep their currencies low and exports high, no matter what the G8 says about discouraging these actions. Every nation has to answer to their own constituencies.

    This will end up artificially propping up the dollar and keeping the US borrowing costs low. Eventually, though, there must be a break somehow. Either rates increase, or currencies fall in value. The only other way is if GDP increases will help us to grow our way out of these problems.

    IB, are you on Twitter?

    1. I agree, the game theory aspect will make things quite interesting. It will also be interesting to see if our countries’ GDP will increases will be enough, and how that will actually play out.

      Sorry RetirementSavior, I haven’t gotten around to being on Twitter yet. As always my projects & investments keep me extremely busy =P

      I’ve added you to my Blog Roll. Feel free to add me to your roll if you find mine interesting =)

      Keep up the good work!

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