China Considers Increasing Canadian Dollar Holdings

Posted December 27, 2009

The US dollar ends the week lower as it becomes clear US interest rates will not be raised before June 2010. The yen continues to weaken as Japan fights deflationary pressures. China has begun to invest in the Canadian dollar as a reserve hedge against a falling US dollar.

 

With the holiday season wrapping up this weekend the currency markets were mostly quiet. The US dollar weakened on Friday to $1.4378 against the euro as the US economy fails to recover as quickly as hoped. There are predictions that unemployment will remain high well past 2010. The current interest rate is at 10 percent.

Overall the US dollar has fallen .4 percent for the week ending 25-December-2009 and further declines are expected into 2010.

The US dollar was at 91.55 yen as of Sunday evening. The yen could continue to weaken against the greenback over the next 12 months as Japan’s economy remains mired in the recession. Japan is experiencing deflation which means interest rate increases are not anywhere on the horizon at this point.

US interest rates are expected to be raised by next June with first solid indications the increase is planned to be indicated at the March meeting of the Federal Open Market Committee.

The Canadian is at C$1.0481 against the US dollar. Parity between the loonie and the greenback in 2010 is still predicted. But Canada’s Finance Minister Jim Flaherty has been publicly talking about the possibility of China buying Canadian dollars. The purchase of Canadian dollars would be a hedge against a falling dollar.

Both China and Russia have expressed concern about the falling US dollar and its impact on their dollar denominated investments. Adding more stable Canadian dollars to the nations’ reserves could offset some of the risk of loss. The Canadian dollar has strengthened by 15 percent against the US dollar in 2009.

China’s oil company, PetroChina Co., has already bought into a Canadian oil project operated by Athabasca Oil Sands Corp. The Canadian company Teck Resources, Ltd. sold a 17 percent share of the company to China. Canada’s Prime Minister Stephen Harper has been actively seeking investment by China in its oil, metals, and bond markets.

Canada’s main concern is a Canadian dollar that appreciates too high and too fast. A strong Canadian dollar could slow the pace of economic recovery.

The Russian economy is slowly emerging from the recession but 2009 is expected to post a 8.7 percent contraction. The forecast is that the GDP in 2010 will expand by a minimum of 2.5 percent. Russia’s economic growth is highly dependent on oil and gas revenues and not much else.

 

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