Why Russia wants the loonie

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  1. Rage

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    Why Russia wants the loonie

    Tavia Grant

    Globe and Mail Update Published on Wednesday, Nov. 25, 2009 8:47AM EST Last updated on Wednesday, Nov. 25, 2009 2:36PM EST

    [​IMG]
    Russia's central bank says it will add the Canadian
    currency to its reserves, sparking a jump in the loonie



    The Canadian dollar rose more than half a cent Wednesday after the Russian central bank signalled it plans to diversify some of its reserves into the currency.

    The statement triggered wide-spread gains in the loonie. The currency rose to a one-week high of 95.13 cents (U.S.) from yesterday's close of 94.52 cents and advanced against the euro and Mexican peso.

    “The Canadian dollar has strengthened across the board on that news story,” said Ian Stannard, senior currency strategist at BNP Paribas SA in London. “The diversification theme is one that's going to remain in place for some time.”

    Mr. Stannard sees further Canadian dollar gains in the short run as investors seek assets in commodity-based currencies. “I would expect it to remain well supported in the current environment, given that we're seeing quite a high level of risk appetite, which is fuelling the rally.”

    It’s difficult to judge the timing of any Canadian-dollar buying by Russia, strategists said.

    “Like any central bank, for them to announce it, they may have already started doing it,” said David Bradley, director of foreign exchange trading at Scotia Capital.

    Wednesday’s move came as the Bank of Canada makes its next statement on interest rates Dec. 8. The central bank is almost certain to stick to its plan of keeping rates on hold through the middle of next year, and has repeatedly warned that a strong currency will curb growth.

    Further moves to diversify away from the U.S. dollar will bolster the Canadian currency, Royal Bank of Canada added.

    "The size and timing of Canadian-dollar buying by either the Bank of Russia, or any other central bank for that matter, remain unclear and will probably never be fully known," said Matthew Strauss, senior currency strategist.

    But even minor re-jigging of foreign reserves holdings in favour of the loonie "could have a significant impact on the currency given Canadian dollar's relatively limited foreign-exchange turnover" of just 4.2 per cent of daily global turnover.

    Record gold and higher copper prices also lifted the loonie Wednesday, strategists said.

    The move came as the U.S. dollar buckled against most other major currencies.

    Russia is not the only country diversifying its foreign currency holdings away from the weakening greenback. Many Asian central banks have also been diversifying in recent years, though it's rare that the Canadian dollar is specifically mentioned.

    Last week, for example, Indonesia said it's considering its first sale of bonds in euros as part of a diversification strategy.

    Russia has gradually been diversifying its $400-billion reserves – the world's third largest – to reduce dependence on the U.S. dollar.

    “Technical preparations are under way for operations with Canadian dollars. Then there could be a couple of other currencies and this will be it,” Russian central bank official Sergei Shvetsov said.

    The Canadian currency has risen 16.7 per cent this year against the greenback, one of the world's top-performing currencies.

    The loonie's rally started overnight, even before Russia's comments, with comments from an Australian central banker predicting a boom in resources investment, said Gabriel de Kock, New York-based global currency strategist JPMorgan.

    “They're looking at a much stronger growth outlook on a multi-year basis, and globally that looks good for commodities and for commodity currencies,” he said.

    In a forecast released yesterday, JPMorgan said it expects the Canadian currency to trade at around parity next year.

    Reserve Bank of Australia Deputy Governor Ric Battellino said Wednesday the country's economy had entered a new growth phase that would last for years.

    With files from Reuters


    Canadian dollar up on Russia move - The Globe and Mail
     
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