Clipping the Loonie’s Wings

What can be done to halt the damage to jobs and our economy being caused by the excessive appreciation of the Canadian dollar against the US dollar?  The Bank of Canada have noted the problem, but appear to think there is no solution.

Erin has argued here that the Bank can always sell Canadian dollars, and that it is far easier to bring an exchange rate down than to prop one up.

And our government has a potential tool to hand in the form of taxes on short term inflows of foreign capital which appear to be the key force acting on the Canadian dollar today.

As the note below shows, other countries seem to be doing just that.

FACTBOX: Capital controls on the rise around the world
Thu Nov 19, 2009

LONDON (Reuters) – Authorities from Brasilia to Moscow to Jakarta are moving to curb what they say are ‘hot money’ speculative flows fuelling rapid currency appreciation and destabilizing their recovering economies.

With currency market intervention seen as increasingly inflationary, governments are resorting to direct capital controls to prevent local bubbles expanding and bursting.

In contrast to controls imposed by emerging economies at the height of the global financial crisis last year, the latest measures are aimed at slowing massive capital flows from investors seeking higher yields amid the persistence of near-zero interest rates in the biggest developed economies.

Below are some of the measures that emerging economies have either taken or are considering taking:

ASIA

TAIWAN

Taiwan this month imposed a ban on foreign funds investing in local time deposits, in a move seen designed to fend off appreciation pressures on the Taiwan dollar.

INDONESIA

Indonesian officials have downplayed the prospect of capital controls after comments this week from monetary policymakers about possible curbs on foreign holdings of short-term central bank debt knocked the rupiah currency.

But Indonesia’s central bank was studying a possible limit on the foreign ownership of one-month central bank debt as an option to control hot money flows, a source told Reuters.

SOUTH KOREA

South Korea this week announced measures to tighten control over foreign exchange liquidity, including restrictions on currency forwards trading. The moves are expected to ease appreciation pressures on the export-focused country’s won currency, which hit 14-month highs this month.

INDIA

India’s finance secretary on Thursday denied a newspaper report that the government was planning to cap overseas borrowing by Indian firms.

The finance minister has said India had the tools to deal with the influx of foreign capital if it became disruptive but this was not a concern yet.

LATIN AMERICA

BRAZIL

Brazil this week unveiled a 1.5-percent tax on foreign investors converting American Depositary Receipts issued by Brazilian companies into receipts for shares issued onshore.

Last month, authorities announced a two percent tax on foreign investment in Brazilian equities and fixed-income securities to curb inflows that have driven the real currency 34 percent up against the dollar this year.

CHILE

Chile’s finance minister on Thursday repeated a warning made last week that the government would act to curb the strength of the peso, which has surged over 20 percent against the dollar this year.

COLOMBIA

Colombia has halted the monetizing of dollars of the state assets it holds abroad as part of measures unveiled last month to reduce the strength of its peso.

EMERGING EUROPE

KAZAKHSTAN

Kazakhstan has introduced legislation that would allow it to enforce capital controls if necessary but the authorities have not used the option.

RUSSIA

Moscow has allowed its ruble currency to scale new highs versus its euro-dollar basket but the central bank has said it could in theory consider a Brazilian-style tax on foreign capital flows. However, it stressed this week that it is against the re-introduction of capital controls and would prefer “soft measures” such as the monitoring of external borrowing of state-controlled firms.

TURKEY

Turkey’s constitutional court last month ruled in favor of making withholding tax on securities equal for domestic and foreign investors. Turkey scrapped the withholding tax for foreigners in 2006.

The ruling will go into effect nine months after publication, and in the meantime the government is working on fresh measures.

The court ruling is not a government-imposed capital control but analysts say it has the same impact on flows.

AFRICA

SOUTH AFRICA

South Africa last month eased foreign exchange controls on domestic companies, increasing the limit for company applications to make outward investment and removing a 180-day rule deadline for companies to convert their foreign exchange into rand.

The rand has risen 25 percent against the dollar this year.

3 comments

  • Nice summaries of what the rest of the world is up to.

  • Your really trying to say you would be justified by recent comments not actions that we should intervene,
    if strong currencies are not the answer who will be left to purchase and consume world exports if what the Author writes pans out, if all the countries support their exports and sink their currencies and the US keeps doing acting exactly the same, we have a problem.

    The one country you forget to mention probably explicitly is the US, the thing this author forgets to mention, the US dollar has not stopped falling. Untill there is a techinical bottom their is nothing our central bank can do because the they can not out sell or out print or out borrow dollars then the Federal Reserve.

    Tell me Andrew Jackson, when will there be a FED chairman who imposes Paul Vockler Monetary tightening in the US. Or any progressive out there???

    Who will buy all these exports with devalued weaker currencies, That cannot ever work, and has nevered work.

    If strong currencies are evil and we have to slash rates and start quantitative easing, like Zimbabwe, Argentina, Wiemar republic. Sets yourself for a bigger crash which would have not been possible if the money had not been created in the first place because if the velocity of money exponentially increases faster then the central banks are ready for, which can and has happened is extremely negative for the economy. We are just humans after all.

    Then to take a step further as geo political events pan out, it is increasingly important of the US dollar diversification story that is taking place and you if you want to be on the recieving end of that trade a favorable US dollar exchange rate is not the way. i would rather be in CAD given Russia recent purchase.

    the Central Bank of India (CBI) bought 200 tonnes of gold at a 1000$ an ounce (Buying at this price level now makes it a support and not a resistance level) with many more insurance giants, hedge funds and other central banks shifting reserves from the US dollar to protect value to Gold, CAD, Euro, maybe everyone should pile into gold at least other currencies wouldn’t be rising but why are they rising and they genuine fear of the US central bank, and if capital keeps fleeing and if their trade deficit doesn’t shrink they will have problems; and we wont help our neighbor by undercutting our currency.

    If it can happen to the US, it can happen to us. Take Russia’s very recent purchase of Canadian dollars. Do you think they would do that, not talking to our central bank, and second do you think they would buy reserves of country that was about to put a break on its currencies appreciation. Reserves our meant to appreciate. Cant really hold on to reserves of a weakening currency. Defies basic logic.

    Given this new found US dollar diversification, we will probably see Higher interest rates, wages will decrease with the cost of living and minimum wage will fall in line with current inflation targets instead of extending the benefits.

    The central bank of Canada must understand this, as I do, Russia wouldn’t diversify out of the US dollars which is falling and put it into another currency that is falling? Where is the logic in that. I expect our dollar to go higher, in that scenario Business will suffer with current tax and regulation laws finding it hard to compete, So we must lower taxes on your small businesses change our regulation to become efficient not just add regulation but serious reform, some regulation we don’t need, some regulation only does bloat certain pay grades and pay checks.

    Otherwise they wont be able to compete internationally due to the higher dollar when if we will have to be extremely generous in a higher dollar scenario to help our Canadian entrepreneurs and small business, even corporations, self employed to stay competitive. Until the US consumer is undeniably and the USD has bottomed back we cannot weaken our currency in any shape or form and I think the central bank of Canada agrees until geo political and macroeconomic changes start to favor the US.

    The only country, that is truly acting the way you write is China, yet you make no mention. They have their reasons not just for exports, but also their treasury holdings since they really do not want to take a 14% hit in their US reserves. What you ask, and almost the whole international community agree is unsustainable and creates imbalances.

    When Obama told China it could not go back to previous established models of growth because their unsustainable and created imbalances, he was indirectly talking to all of the US’s trading partners that our thinking of similar actions.

    Why do you seem to ignore the US and Chinese policy? We can act but we have to act cautiously. No bold or brash actions. We do not have the problems facing other countries and we should keep that going.

    All dollar negatives, US 0% intrest rates, USD Carry Trades, Friegn central bank and international institutions(Banks,hedge funds, insurance giants) USD diversification.

    Then the Tax trap, I dont believe Americans can be taxed enough to retire this debt and when higher tax rates fail to bring in needed revenue to reduce the deficit; investors will flee like mice, and the US will have a currency crisis and the worst thing we can do in that scenario is weaken our or peg our currency to the USD.

    Really the only thing I disagree with Harper and our Central bank committee is there willing to lower taxes and run a deficit.

    You cannot do both. Lowering taxes and running a deficit was George W Bush approach, lowering taxes is only works if government spending doesn’t outweigh the tax cuts benefits otherwise people spending decisions are unaltered as they save more to pay off the new debt. This will have people will save because of these deficits and leave spending unaltered.

    Either A You have Record deficits(increase in spending) with high taxes so that disposable income can reach the economy or B lower taxes and low to no deficits(reduction in spending) so that the disposable income can reach the economy.

    I just dont see approach A will work in a higher dollar scenario but B seems more plausible.

    If I ever see a Paul Vockler In the FED again I will concede every argument to the progressives.

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