Will Canada Intervene To Stem CAD Strength?

Following Japanese and Swiss authorities’ intervention in the currency markets, the focus is on Canada, where the Bank of Canada (BoC) expressed concerns over the persistent strength of Canadian dollar (CAD).

“In response to Swiss and Japanese actions to stem currency strength and given the BoC’s lingering concerns about persistent CAD strength, there are questions as to whether the BoC will take a similar path. We think not,” RBC Capital Markets said in a note.

The BoC last intervened unilaterally in 1998, and may intervene in response to “disruptive short-term movements,” or a “serious near-term market breakdown.” Neither characterizes recent CAD developments. The BoC is not neglecting CAD though, the note said.

On Thursday, the Japanese authorities intervened in the FX markets to sell the yen, in a bid to prevent any negative effect of strong yen on the economy, which was hit by a devastating tsunami and earthquake occurred in March this year.

“JPY selling intervention by Japanese authorities on Thursday was likely to have amounted to around 4.56trn yen, broadly in line with the earlier report by Nikkei daily, based on market speculation, more than double the latest unilateral intervention seen last September (2.1249trn yen), and the largest ever one-day intervention,” Barclays Capital said on Friday.

Similarly, the Swiss central bank on Wednesday announced measures to contain the strength the Swiss franc (CHF), as the safe haven demand for its currency has been increasing since the beginning of this year, due to continued risk aversion dominating the market sentiment amid concerns about financial stability and the global economic outlook.

A recent Business Outlook Survey by BoC showed that manufacturing firms with exports mainly to the US and those not benefiting directly or indirectly from high commodity prices were feeling more of a pinch from CAD strength.

“Crucially however those firms were simply “less” optimistic than others. CAD strength had not generated pessimism. This materially dampens the risk of BoC intervention, despite its CAD concerns,” RBC Capital Markets said.

Given that the US remains, by far, Canada’s largest trading partner, the BoC’s CERI, and the BoE’s CAD effective exchange rate do tend to show a steady appreciation of CAD, which suggests that CAD is not currently subject to disruptive movements or market breakdown, it said.

However, the BoC is wary of persistent CAD strength but won't interfere in the FX markets under current conditions, the note said.

“We appear to be entering a race to the bottom of sorts, with authorities across the board seeming to favour currency weakness. In the medium-term we believe unilateral intervention will not alter the long term trend in currencies,” said another HSBC Global Research note.