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The Russian central bank is preparing to invest in the loonie causing a surge in the Canadian dollar.
The Russian central bank will invest some of its foreign exchange reserves in the loonie to diversify its portfolio and reduce its dependence on the U.S. dollar, the Central Bank of the Russian Federation announced Wednesday.
Many central banks realize the potential to be burned by lopsided foreign exchange reserves, Sacha Tihanyi, a currency strategist with Scotia Capital told QMI on Wednesday.
"(The loonie) is a natural choice for a currency that would be more likely to hold its value over time," Tihanyi said.
The news sent the Canadian dollar skyward about one cent while the U.S. dollar was pushed to its lowest levels in more than a year.
"This is not a game-altering development," Eric Lascelles, chief economist and rates strategist for TD Securities, told QMI in a telephone interview from Toronto.
The Russian central bank is one of the bigger federal banks out there with more than $430 billion US in reserve.
And despite the recent shift toward the Canadian dollar, Russia remains heavily weighted in the U.S. greenback and euro with well over 80% of its total reserves in those two currencies.
"Realistically Canada might get something like 2% of Russia's investable reserve assets." That works out to roughly $8 billion US Lascelles said, adding there's no way of knowing exactly how much Russia is planning to invest.
We've started to see more interest in Canada as a place to put reserves, due in part to healthy banking and housing sectors, Lascelles said.
"Canada is shining quite nicely right now."
But the economy doesn't always benefit from a high currency.
A strong movement toward the Canadian dollar could make things more difficult for the manufacturing industry which depends upon a relatively low Canadian dollar for export purposes, Tihanyi said.