Financial thoughts

Canadian Finance Minister Jim Flaherty said he's concerned about “upward pressure'' on the nation's currency, as some investors bet the Bank of Canada won't match interest-rate cuts in the U.S.

“We want to avoid volatility and speculation of our currency,'' Flaherty, 58, said today in a Bloomberg Television interview in Tokyo. “I'm always concerned about upward pressure on the Canadian dollar.''

Canada's dollar yesterday jumped against its U.S. counterpart after a larger-than-expected increase in employment fueled speculation the Bank of Canada wouldn't follow the Federal Reserve's rate reductions, resulting in a wider rate advantage over the U.S.

The gap between Canadian and U.S. benchmark rates is the biggest since June 2004, after Fed Chairman Ben S. Bernanke eased by 1.25 percentage points to 3 percent in less than two weeks. The Bank of Canada, which has cut its rate twice since December, has said it may need to lower it again this year.

The central bank will have to “look at'' the growing differential between Canadian and U.S. interest rates, Flaherty said in the interview. “But it's up to him,'' he said, referring to Bank of Canada Governor Mark Carney.

More Jobs Added

The Canadian currency rose the most in more than two weeks against the U.S. dollar and gained against all 16 most-traded currencies. The government said yesterday the economy added 46,400 jobs last month. The increase, more than four times the median forecast in a Bloomberg News survey, pushed the jobless rate back to a 33-year low of 5.8 percent set in October.

Canada's job gain contrasts with a U.S. Labor Department report last week saying the world's largest economy lost 17,000 jobs in January, the first decline in more than four years.

Investors yesterday scaled back bets on how much Carney will cut the central bank's benchmark rate of 4 percent in the next few months. The yield on the bankers' acceptance contract due in March rose 5 basis points to 3.68 percent yesterday on the Montreal Exchange. There are 100 basis points in a percentage point pay day loans.

“There is no doubt that the Canadian economy is much more robust than the U.S.,'' said Alan Ruskin, Greenwich, Connecticut-based chief international strategist at RBS Greenwich Capital Markets.

Currency's Gains

Canada's dollar advanced 0.93 percent to 99.94 Canadian cents per U.S. dollar at the close of trading in Toronto yesterday. It traded at a two-week low of $1.0087 on Thursday, on concern a U.S. slowdown will hurt the global economy.

Flaherty said he gets concerned “especially'' when the currency moves beyond the Bank of Canada's “range'' for the dollar, which he's defined in the past as somewhere between $1.02 and $1.05.

Flaherty is in Tokyo to attend a meeting today of finance ministers and central bank governors from the Group of Seven industrial nations.

European officials in Tokyo also expressed concern about their currency's gains. The euro has risen 11.5 percent against the dollar in the past year.

French Finance Minister Christine Lagarde said the stronger euro “continues to pose difficulties for European exporters.'' Joaquin Almunia, European Union commissioner for economic and monetary affairs, said the currency is trading above its “equilibrium.''

The slowdown in the U.S. will impact the Canadian economy and downside risks are “significant,'' Flaherty said. Still, the government is still on track to meet debt-reduction targets of C$10 billion ($10 billion) for the current fiscal year and C$3 billion annually in coming years, he said.

The government also is considering a capital gains tax break for investors promised by the ruling Conservative Party in the last election campaign.

“I really would like to do something on the capital gains side,'' Flaherty said. “It's a question, then, what is the best type of measure and what is affordable given the economic slowdown this year.''

Source