The Americas: While US Catches Cold, Canada, Mexico Don't
Platt, Gordon, Global Finance
David Dodge, the new governor of the Bank of Canada, wasted no time in getting ahead of the curve in early March, when he slashed interest rates by 50 basis points, a larger cut than most economists were expecting.
Canada is outperforming the US economy this year, and a big dose of monetary stimulus was seen as somewhat aggressive.
The Canadian dollar jumped sharply in response to the move, however, which was interpreted by market participants as helping Canada guard against the effects of a US slowdown, says Lara Rhame, senior currency economist at Brown Brothers Harriman. "On a very basic level, this shows that the currency markets are being driven more by growth differentials rather than interest rates," Rhame says.The Bank of Canada also moved in anticipation of further easing by the US Federal Reserve, she says.
The Mexican peso has also held up well in the face of the sudden slowdown in the United States.The cooling was a pleasant breeze to an economy that was in real danger of overheating.
"Even though the Mexican peso is overvalued by several measures, it has remained relatively strong, due in part to the fact that the new government under President Vicente Fox has introduced fiscally responsible legislation," Rhame says. …