A mounting chorus is urging the Bank of Canada (BoC) to intervene in currency markets to brake the loonie’s rise. The last time the Bank intervened unilaterally in foreign exchange markets was in September 1998. Since then, global trade has exploded and so has foreign exchange turnover. According to the Bank of International Settlement, average daily turnover in global foreign exchange markets stands at more than $US 3.1 trillion currently (up from $1.4 trillion in 1998). Of this amount, more than $100 billion is traded in Canadian dollars. Given these volumes, we are sceptical that unilateral action by the BoC would be the appropriate approach. In our opinion, CAD strength is a reflection of USD weakness and the lack of alternatives for investors. Indeed, with most Asian countries pegged some way or another to the USD, the brunt of the greenback’s depreciation is borne by the more traditional free-floating currencies. Many of Asia’s currencies are currently undervalued by roughly 40% relative to their respective purchasing power parity value. International coordination will need to take place at some point to address this situation and avoid the threat of protectionism.
Mounir R. El-Ayari, CIM, FCSI, C.h. P. Strategic Wealth
Associate Portfolio Manager