Monday, September 24, 2012

With currency wars heating up, can Canada compete?

According to the Globe and Mail the Canadian dollar is getting too popular.
Ms. Sutton noted that the Bank of Canada is now the "lone hawk" among the major central banks, citing some form of stimulus from the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England.
Sébastien Galy of  Société Générale said positioning in the Canadian currency is now "extreme."
Canada of course has it's own ways of domestic stimulation too, such as maintaining the low interest rates just so we can compete with these print-on-demand currencies. However, when it comes to stimulus there would really just be no point as our economy just doesn't size up to these other countries and is based on a different set of fundamentals anyway. Part of the reason that these other countries need to stimulate more is to continue affording resources from countries like Canada.

Of course, this particular relationship can not last forever, the upwards strain being put on the Canadian dollar isn't really a good thing for us over the median term. These 4 major economies are locked in a currency war, along with China, and Canada looks to be trapped in the middle which I imagine is really making Mark Carney upset as the possibility of an interest rate hike is fading from view.

QE3's policy of continuous money printing puts an interest rate hike completely off the table with one exception. Canada could work with emerging markets to align the CAD with whatever they decide is to be the standard currency for trade. China is already regularly trading for oil now without using the USD. I've written about this decoupling scenario before here and the continued talk from the federal government about how our future lies with emerging markets still leads me to believe this option is still on the table, albeit covertly.

It would have to be done covertly of course, as refusal of USD is often a cause to be labeled an enemy of the United States. The USD is backed essentially by the gun in your face competing with the gun in everyone's face. The competitive desire to not be blown up provides the value.

This polarizing issue is going to become front and center as the major economies worldwide compete for the world's last energy resources and of course that means competing with for trade deals with energy providers. Have you noticed that everyone worldwide wants a little piece of Canada lately? From Britain, to China, to India and of course, the U.S.

What happens though when this currency war heats up? What happens if say the U.S. starts putting sanctions on Chinese trade in an attempt to "encourage" them to revalue their currency? Don't think it can't happen, desperate times will call for desperate measures and already old rivalries are heating up. Who will Canada side with then?

The one silver lining I see is that in the near term the upwards strain on the Canadian dollar should help offset some of the incoming inflation from the 2009-2010 stimulus measures. Remember, it takes several years for "stimulus" to re-hypothicate itself down to the main street economy. We won't be seeing the main street results of QE3 for a few years yet. Get ready, folks, we ain't seen nothing yet.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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