Trading the Canadian dollar has brought an early Christmas for speculators cashing in on its instability. Our dollar lost three per cent of its value in trading Monday, as speculators took profits. This followed a run up to $1.09 (U.S.) last week against the U.S. dollar, as speculators jumped ship from the U.S. dollar to get aboard the Canadian dollar.
How did speculators ride the bounce up, and then cause the dollar to fall back?
The U.S. financial system is reeling from the billions in losses suffered by its leading players: Morgan Stanley, Merrill Lynch, Wachovia, Citibank, Goldman Sachs. With $30 billion in losses recorded overall, uncertainty reigns, so American money flows out of stocks, and into bonds. This pushes bond prices up, and bond yields (the interest they pay) down. The U.S. Federal Reserve has already lowered interest rates twice, and is set to do so again December 11.
U.S. speculators buy Canadian bonds with borrowed U.S. dollars. The selling drives down the value of the U.S. dollar, and the Canadian dollar goes up, at its highest to the $1.10 level. The yield on Canadian bonds goes down, but still brings speculators about one-half a percentage point more than U.S. bonds, in addition to the gain of several percentage points — in only a few days — on the exchange rate. Speculators like the odds when a three percentage point gain in a speculative trade in a week, is measured against a three per cent interest payout over a year.
The Bank of Canada has made no effort to counter speculation. On the contrary the Bank threatens to raise interest rates to fight inflation, which is absurd given the deflationary effect of the rising Canadian dollar.
The speculators reverse their trades, selling Canadian dollars, taking huge profits underwritten by the indifference of the Bank of Canada. The Canadian dollar falls back, temporarily. There is no reason to believe the speculative cycle will not start up again.
A lot of Canadian families are not going to enjoy this Christmas. The steady run-up in the value of the Canadian dollar, as the U.S. dollar tanks worldwide, makes the economic game plans of the last 20 years look pretty stupid. The vaunted Mulroney free trade deal of 1988, and the NAFTA endorsed by ChrÃ©tien (a.k.a, the put all your eggs in one basket strategy) now make even less sense than ever.
The Canadian dollar has gained some 25 per cent against the U.S. dollar in 2007, moving from 85 cents U.S. January 3, to above 1.05 every day last week. This has had the same effect as if the Americans had put a 25 per cent across-the-board tariff on Canadian exports, while Canada took off a 25 per cent tariff against all American imports. Just for comparison, before the 1988 FTA, the average American tariff on Canadian exports was one per cent; and the average Canadian tariff on American imports was four per cent.
If you are a Canadian working in manufacturing exports, chances are you have been hurt, or will be hurt soon. The resource sector is super vulnerable to a fall in commodity prices, putting resource workers on notice. Naturally the government has no plans to deal with the ineptitude of government trade policy, and no intention of changing the free trade approach, which has been our economic strategy since 1988.
In his memoirs Jean ChrÃ©tien brags about how he made tourism a major industry contributing to economic growth. Thanks to the bouncing dollar places like Mont Tremblant, Banff, Jasper, and Whistler can look forward to Canadian skiers going to visit the cheaper slopes in the U.S., while U.S. winter vacationers stay home. The hospitality sector in general is going to hurt because of the high dollar, just as it feasted on the low dollar.
Who wins, apart from those speculating against the U.S. dollar?
Those American companies that have been buying up corporate Canada in recent years see the value of their Canadian assets increase with the fall in the U.S. dollar. Those Canadian companies and individuals who bought assets in the U.S. have taken a hit. Taking off the restrictions on pension fund and RRSP income tax funded investments outside the country makes past Finance Ministers Wilson and Martin responsible for billions in losses for retirees.
In the midst of this mess, confusion conquered the Bloc QuÃ©becois, which still wants Canada to adopt the U.S. currency, despite the fact the world is dumping the U.S. dollar as fast as it can.
Forget what you read in the business press, it is not true that the Bank of Canada is alone responsible for the exchange rate. James Flaherty, Minister of Finance, is Governor of the IMF for Canada, the body that oversees exchange market practices, and the Minister of Finance has the authority to direct the Governor of the Bank of Canada to take action to stabilize the exchange rate, notably by reducing interest rates to U.S. levels, and leaving them to move in tandem with U.S. rates, so as to reduce de-stabilizing speculation on a rising Canadian dollar. Those who suspect the people in charge do not have a clue would be right.