TORONTO, Sept. 27, 2012 /CNW/ - Global trade may be anything but free if
Canada's trade agreements focus solely on eliminating tariff and
regulatory barriers, and not on currency intervention policies abroad
that are driving the country's trade and monetary imbalances, notes a
new report from CIBC World Markets Inc.
"Trade may be liberalized, but are the exchange rates that set relative
prices and costs also going to have their shackles removed? If not the
free market will be anything but free," says Chief Economist at CIBC,
who co-authored the report with Economist Emanuella Enenajor.
Several of Canada's trading partners have been intervening to keep their
currencies softer than markets would otherwise take them, giving them
cost advantages in both Canadian markets and in competition for share
of the U.S. market, notes Mr. Shenfeld. That practice has been
particularly prevalent in emerging markets. In the process of selling
their own currencies, emerging market central banks have built up
reserves that in many cases exceed 30 per cent of GDP.
While these reserves were formerly largely in the U.S. dollar, Euro and
other major currencies, the study estimates that holdings of non-major
traditional reserve currencies, including the Canadian dollar, have
grown five fold in the last half decade, to the equivalent of $US 550
Buying by foreign central banks and sovereign wealth funds has played a
key role in the accumulation of $280 billion in Canadian bonds by
foreign investors, compared to only $65 billion in the prior five year
period. Such buying has been amplified by Canada's solid credit rating
and safe haven status, says Mr. Shenfeld but has pushed up the value of
the loonie in the process. The IMF now puts the Canadian dollar as
among the most overvalued currencies relative to trade fundamentals.
While foreign purchases of Canadian bonds have helped keep yields lower,
the strengthened currency has dented net exports. To avoid further hits
to exports, Mr. Shenfeld says that the Bank of Canada is stuck keeping
interest rates lower than they otherwise would be, which presents
another risk. "That might be too much of a good thing for sectors like
housing, where a long period of low rates risks building a house price
and mortgage credit bubble."
The report further notes that "while Canada recently opted to delay a
formal deal on tariffs and other barriers with China, the issue of
trade will remain front and centre in relations with Asia's largest
economy. But the bigger picture goes beyond just tariffs and regulatory
barriers, centering on currency and other policies that affect the
balance of trade between Canada and China, and other emerging market
"Currency policies are politically sensitive, but dealing with such
sensitive issues is what trade negotiations should be all about."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eisep12.pdf
CIBC's wholesale banking business provides a range of integrated credit
and capital markets products, investment banking, and merchant banking
to clients in key financial markets in North America and around the
world. We provide innovative capital solutions and advisory expertise
across a wide range of industries as well as top-ranked research for
our corporate, government and institutional clients.
SOURCE: CIBC World Markets
For further information:
Avery Shenfeld, Chief Economist, at 416-594-7356, firstname.lastname@example.org; Emanuella Enenajor, Economist at 416-956-6527, email@example.com; or Tom Wallis, Communications and Public Affairs at 416-980-4048, firstname.lastname@example.org.