Oh! Canada: The country joins Brazil in trying to weaken its own currency against the U.S. dollar.

10/22/2009 10:30 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Talk is cheap but the Canadian loonie isn't. So the Bank of Canada is using words to try to slow the rise of the Canadian currency against the U.S. dollar.

The loonie is up 19% against the U.S. dollar in 2009 and that's bringing real pain to the country's exporters. When the Canadian dollar gets more expensive versus the U.S. dollar, Canadian goods cost more in the United States, Canada's biggest export market.

With its attempt to talk down the loonie, the nickname name for Canada's currency because the one dollar coin is graced with a picture of that North American lake-diving bird, the Bank of Canada joins  Brazil in the ranks of export economies that are willing to try just about anything to slow the rise of their own currencies. On October 20, Brazil slapped a 2% tax on overseas investments in Brazil's financial markets. That brought a brief one-day pause in the rise of the real.

According to the Bank of Canada's clearly exaggerated rhetoric, the country is a basket case and you'd be better off putting your money into Zimbabwe.

The bank cut its estimate on Canadian GDP growth over the next two years. And pushed back its projections for when inflation will return to the economy by three months. To investors and currency traders that was a signal that the Bank of Canada will be slower than expected to start raising interest rates.

The  bank left its GDP growth forecast at 3% for 2010 even though the economy is actually growing at a higher rate than that right now. For 2011 it cut its growth estimate to 3.3% from an earlier 3.5% projection. 

The bank had previously said it would leave short-term interest rates at 0.25% until June 2010. But following an interest rate increase from the central bank of Australia earlier this month, traders had concluded that other commodity exporting economies would soon follow suit. Higher interest rates help a central bank fight inflation by slowing economic growth but they also strengthen a country's currency. That's not what the Bank of Canada wants to do now.

Bank of Canada governors have been at pains in recent speeches to stress that Canada and Australia find themselves in very different positions. Inflation is already worrying high in Australia and threatens to push higher. In Canada, in contrast, consumer prices are projected to fall 0.9% in the third quarter.

But there is one way that the two countries are alike--and this is what concerns the Bank of Canada. Like Australia, Canada is an export economy with a relatively small domestic market of just 34 million people. Growth in the Canadian economy depends on exports to the United States.

And that's exactly where a higher loonie hurts the most.

Look out for other exporting economies to announce their own measures to slow the appreciation of their currencies against the dollar in coming days.

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