The global race to the bottom

While not as dramatic as the recent decision by the Swiss Bank to forgo keeping its currency at a lower than market value level, the Canadian dollar was the recent victim of a central bank action when the Bank of Canada decided to drop interest rates by 0.25%. The Canadian dollar is down 2 cents to about 80.7 cents USD (or about 1.24 CAD/USD).

BAX Futures were not anticipating this decrease – today, they are are all trading up about 0.3% as a result of the Bank of Canada’s actions.

My general thought is that the Fairfax theory of the global economy is showing itself to be true – deflationary forces are forcing export-driven economies to devalue their currency. The next leg to drop will be the European Union officially announcing their version of quantitative easing, of which has already had negative implications to their own currency. Japan has already been in this mode for a couple years (Abenomics).

The remaining leg will be when/if the US federal reserve decides to implement interest rate hikes. On today’s decision by the Bank of Canada, federal funds futures are relatively unchanged; they anticipate the US federal reserve will raise rates a quarter-point by the end of the year.

This will also create an interesting dilemma for the Chinese government – their economy is highly export oriented and their competitive position continues to be eroded by the macroeconomic decisions of other countries. Whether they choose to slowly deflate the Yuan in reaction to this remains to be seen.

While the cause of the Bank of Canada’s decision is related to the very sudden decline in the oil market, I am wondering whether the country is simply getting carried away in the geopolitical currents that seem to be affecting every developed country at the moment.

Right now I am over 50% exposed to US currency (the rest of it being Canadian), so I am not minding this trend. What I am regretful for, however, is that this will have a material impact on my willingness to go down to the USA for recreational purposes.