The Canadian dollar edged closer to parity with the U.S. currency on Wednesday, following news that the Russian central bank will invest in the loonie and diversify away from the greenback in a move that could indicate a global trend.
The Russian central bank said it plans to invest some of its foreign exchange reserves in the loonie to reduce exposure to the U.S. dollar.
John Whalley, a distinguished fellow in global economics with the Centre for International Governance Innovation, said the Russian announcement could indicate the beginning of global change toward diversification.
“This diversification I think is going to increase and spread and it is to Canada’s advantage,” he said.
“It could indeed induce some switching into Canadian dollars from the U.S. side. It could be the beginnings of a trend that could involve global realignment.”
The Canadian dollar rose to its highest level in a week, closing at 95.65 cents U.S., up 1.13 cents from Tuesday’s close.
The loonie is a commodity currency, meaning the Canadian the economy and currency is linked to the performance of commodities, which have been on a strong uptrend in the past months.
“If you look at strength in currencies around the world it is in the economies that are stable and have resources and oil,” like the Canadian and Australian dollars and Norwegian krone, Whalley said.
Meanwhile, the U.S. dollar slid to a 15-month low against the euro and to 87.56 Japanese yen Wednesday after earlier falling to 87.36 yen, its weakest level since January and close to 14-year lows.
Steven Butler, director of foreign exchange at Scotia Capital, said a Canadian market that has fared better than many during the recession, and a sluggish U.S. economy, make the loonie an ideal investment for banks looking to diversify their investments.
Russia’s is not the first central bank to diversify into the Canadian dollar — there has also been interest in Latin America and Asia — but it is interesting that Russia made the announcement so publicly, Butler added.
“The Canadian economy has weathered the storm much better than a lot of other countries and Canada seems like a pretty logical place to diversify, especially the way the commodities have been climbing higher.”
The size of Russia’s investment in the loonie has not been confirmed, but Butler said Russians have likely already been buying up Canadian dollars.
“That’s probably a reason why Canada has had a decent run of late and, when we see the Canadian dollar weaken, the weakness has been very muted,” he added.
While there are about $50 trillion in U.S. denominated assets circulating worldwide, Butler said there is speculation that banks are aiming for a 50-50 balance between U.S. dollars and other currencies.
“Certainly Canada wouldn’t be the other 50 per cent, you’d have to expect a lot of that to be in euros and some other currencies as well,” he said.
“But it is interesting that Canada has been singled out.”