Policy on foreign exchange intervention
Currency markets can be volatile, and the Bank of Canada may intervene in the foreign exchange markets on behalf of the federal government to counter disruptive short-term movements in the Canadian dollar. Any intervention is governed by an intervention policy, which is established by the government in close consultation with the Bank of Canada.
The last time the Bank intervened in foreign exchange markets to affect movements in the Canadian dollar was in September 1998. Prior to that, Canada’s policy was to intervene systematically in the foreign exchange market to resist, in an automatic fashion, significant upward or downward pressure on the Canadian dollar.
In September 1998, the policy was changed because of the ineffectiveness of intervening to resist movements in the exchange rate caused by changes in fundamental factors. Canada’s current policy is to intervene in foreign exchange markets on a discretionary, rather than a systematic, basis and only in the most exceptional of circ*mstances.
Intervention might be considered if there were signs of a serious near-term market breakdown (e.g., extreme price volatility with buyers or sellers increasingly unwilling to transact), indicating a severe lack of liquidity in the Canadian-dollar market. It might also be considered if extreme currency movements seriously threatened the conditions that support sustainable long-term growth of the Canadian economy; and the goal would be to help stabilize the currency and to signal a commitment to back up the intervention with further policy actions, as necessary.
From time to time, Canada participates with other countries in coordinated intervention. For example, on March 11, 2011, the Bank of Canada joined the U.S. Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan in a concerted intervention to support the Japanese yen.
This web page deals exclusively with intervention directed at affecting movements in the Canadian dollar.
