Stephen Poloz doesn’t like to talk about the dollar.
And yet since he was tapped as Bank of Canada Governor, the Canadian currency has done nothing but fall – to less than 92 cents (U.S.) from near parity last May. The dollar hasn’t been this low in four years, plunging nearly 3 cents this week alone.
To some observers, the currency’s recent sharp decline suggests the Bank of Canada is stealthily engineering devaluation – a gift to beleaguered manufacturers, exporters and domestic tourist operators, and a tonic for an economy suddenly grappling with disinflation.
Mr. Poloz, after all, would like nothing better than to get Canada’s stalled export-led economy back in gear.
But the central bank chief isn’t taking credit, insisting that the Bank of Canada targets the inflation rate, not the value of the currency. His view is that the falling loonie is essentially a U.S. dollar story. The greenback was beaten down because the U.S. was the epicentre of the 2008 financial crisis. Now that it’s on the road to recovery, global capital is once again flowing back into the United States.
The consensus among Bay Street economists is that the loonie is overvalued and will remain under pressure for some time. The new normal is more likely to be a Canadian dollar hovering around 90 cents than at par. Toronto-Dominion Bank economist Derek Burleton, for example, predicts the dollar will break through the 90-cent barrier by this time next year.
Devaluation is both good and bad, depending on your place in the economy. The hospitality and tourist sectors, exporters and particularly manufacturers, which have been losing market share in the world, are among the major winners. So are the people who work in these industries. On the other hand, a weak dollar could stoke inflation, making life more expensive for consumers, travellers and importers.
On balance, however, experts argue that a 90-cent dollar is probably closer to fair value, and therefore a good thing for Corporate Canada and the broader economy. Bank of Montreal, for example, estimates that a 10-per-cent drop in the currency could add as much as 1.5 percentage points to real gross domestic product over two years.
“On net, this could be seen as a good thing because it’s making Canadian goods and services more competitive,” said Michael Devereux, a professor at the University of British Columbia’s Vancouver School of Economics.
Mr. Poloz may not choose to say so, but a lower dollar is exactly what he needs.
The Poloz effect
A note of caution: The forces now driving the dollar lower are complex and volatile. Analysts’ predictions about the direction of currencies are often wrong.
“The dollar is a very imperfect indicator of a much more complicated series of events,” explained Christopher Ragan, a McGill University economics professor and a member of the C.D. Howe Institute’s monetary policy council.
Currency movements are determined in financial markets – the culmination of billions of decisions by individual buyers and sellers.
Prof. Ragan said he sees no evidence that Mr. Poloz has a “weak dollar bias” in either his words or actions.
“He cares about movements in the dollar, but I don’t think he has a bias on where the dollar should be – at 88 cents U.S. or at 95,” Prof. Ragan said. “And I’m quite convinced he’s not prepared to take action to bring those things about.”
But other analysts say the perception of Canada in financial markets has nonetheless been affected by Mr. Poloz’s tone, which has been markedly different from his predecessor, Mark Carney. Mr. Poloz dropped the bank’s interest rate tightening bias in October. He has also fretted more about disinflation and lagging exports than about overindebted consumers or the hot housing market – Mr. Carney’s favourite causes.
“It’s a change in the messaging by the Bank of Canada, and that has a lot of impact on expectations of where interest rates are headed, and that plays out on the dollar,” said Pedro Antunes, director of national and provincial forecasts at the Conference Board of Canada.