The Honourable Jim Flaherty, Minister of Finance, today announced that the Government of Canada plans to issue a US-dollar-denominated global bond in the near future, subject to market conditions. This will be the Government's first foreign currency global bond issue in more than a decade.
The US-dollar bond issue will provide funds to supplement Canada's foreign exchange reserves and to meet foreign currency requirements to support current and anticipated lending by the International Monetary Fund.
Canada holds its foreign exchange reserves in the Exchange Fund Account (EFA). EFA assets provide foreign currency liquidity and support the promotion of orderly conditions for the Canadian dollar in foreign exchange markets. Funds for the EFA can be raised through cross-currency swaps of Canadian-dollar borrowings, foreign-currency-denominated debt issues and outright purchases of foreign currency. In recent years, the Government has relied primarily on cross-currency swaps to finance the EFA. The global bond issue will prudently diversify the Government’s sources of foreign currency financing.
Does this mean Canada is forcing foreign investors in Government debt to buy U.S. dollars to help prop it up?
awake:Does this mean Canada is forcing foreign investors in Government debt to buy U.S. dollars to help prop it up?
No. From what I can tell, it looks like this:
The Canadian government normally issues debt in Canadian dollars. That is, they issue bonds in which investors pay the government Canadian dollars in exchange for more Canadian dollars later.
Now the government has decided to issue bonds denominated in US dollars. All this means is that they want to borrow US dollars. So they will receive US dollars for these bonds, and pay back US dollars to the investors.
There is no force involved - they will likely offer a set amount of these bonds, and the regular Canadian dollar bonds will still be available as well. And it definitely is not in order to help prop up the US dollar - why would they do that? The reason for this is just to fund the EFA which, as the article says, is used to maintain Canadian dollar ForEx markets.
It is a very smart move. Assuming the rate US dollar production by the US central bank (On a percentage basis) is greater than the rate of the Canadian Central Bank then this is perfect arbitriage as the Canadians will get US Dollars Now and the Canadians should be ablve to pay these dollars back with Canadian dollars that should convert to more US Dollars.
This kind of stuff went over on a massive scale in the 1990s with Japan. The Japanese Central Bank had the interest rate at near zero, so "investors" (Speculators is the better term, maybe gamblers) would take loans in Yen and then buy foreign currencies with the money. As the Yen value went progressively down, the investors would be able to pay back the Yen with the higher valued assets.
Basically investors, countries, speculators are stealing wealth from the desire of some countries to run stronger currencies than the host country. The solution is of course market determined commodity money but that ain't gonna happen soon.