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Bank of Canada Governor Stephen Poloz (Adrian Wyld/The Canadian Press)
Bank of Canada Governor Stephen Poloz (Adrian Wyld/The Canadian Press)

Business Briefing

Bank of Canada’s shifting tone ‘undercut’ Canadian dollar in five ways: BMO Add to ...

These are stories Report on Business is following Monday, July 7, 2014.

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How tone moved the loonie
The Canadian dollar has been “undercut” by the shifting tone of the central bank since Stephen Poloz became governor a year ago, Bank of Montreal economists say.

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Douglas Porter and Benjamin Reitzes aren’t suggesting the Bank of Canada is actively driving down the loonie, as the country’s dollar coin is known.

But they do note that the currency has lost almost 6 per cent since the final days of Mark Carney, Mr. Poloz’s predecessor, who left to lead the Bank of England.

Some economists believe the Bank of Canada has deliberately talked down the dollar, which stands at shy of 94 cents U.S. today.

The central bank denies this, though it must be pleased by a weaker currency that would give Mr. Poloz his hoped-for rebound in exports.

“Much of the relative weakness in the C$ in the past year can arguably be ascribed to a change in tone at the Bank of Canada,” Mr. Porter, BMO’s chief economist, and Mr. Reitzes, a senior economist, said in a recent report.

“Some may suggest that nothing has really changed – after all, there has been another year of no move in interest rates, and the bank has not directly talked down the loonie,” they added.

“But, we believe that the bank has changed its tone in at least five separate areas, all of which have undercut the currency.”

Here’s what they highlighted:

1. At just his third meeting, Mr. Poloz shifted the central bank’s “bias,” or the signal it sends to the market of where it’s thinking of heading next on interest rates. He dropped Mr. Carney’s signal of a rate hike at some point to one that’s neutral. (Indeed, Mr. Poloz has left the door open to a rate cut, which has helped hold the loonie in check.)

2. Where Mr. Carney frequently warned consumers about their swollen debt levels and worried about a frothy housing market, Mr. Poloz has said that residential real estate is headed for a soft landing and that consumer debt is “evolving constructively,” negating the suggestion of a rate hike to cool things down. Mr. Carney had gone so far as to threaten a rate increase at one point to force consumers to slow down.

3. While Mr. Carney “famously lashed Canadian corporations for holding on to dead money, for not investing enough, and for failing on productivity,” Mr. Poloz “views the building of company cash as a drive to strengthen balance sheets, and remains upbeat that capital spending will eventually follow – with better exports the crucial driver.”

4. Mr. Carney “pulled no punches” in rejecting the idea of so-called Dutch disease in Canada. Mr. Poloz, in turn, “seems much more open to the possibility that rapid resource development and higher commodity prices (and thus a higher C$) are indeed crowding out manufacturing and other tradable sectors … If a strong currency is a heavy weight on the economy, the bank may favour a weaker C$.”

5. The central bank’s view on inflation, of course, is key to where it could be heading. Mr. Poloz has said he’s anxious over low inflation, which would mean no pressure for a rate hike. “At the start of 2014, Governor Poloz suggested that his biggest concern was that inflation was too low for comfort … Carney was much less vocal about low inflation.”

The Canadian dollar has perked up recently, no doubt an issue for Mr. Poloz and his colleagues as they head into their next meeting next week.

Not only has the loonie climbed of late, but speculators betting against the currency are now in full retreat.

The latest report from the U.S. Commodity Futures Trading Commission, released today, showed that the net position for the Canadian dollar has now turned positive.

Short positions have been declining, reaching just $500-million as of the previous report, down from about the $6-billion level earlier this year.

Today’s report, however, shows net long positions of $253-million.

It’s the first time since February, 2013, that that has happened, highlighting the shift to “favourable” sentiment and “removing a major weight against CAD,” said chief currency strategist Camilla Sutton of Bank of Nova Scotia, referring to the loonie by its symbol.

“The net long position … is very small, but it is not the size but the shift to a more balanced outlook that is important,” she said.

Ottawa aims to spur competition
The Canadian government is moving again to spur competition in a wireless industry dominated by three players, aiming to push smaller companies to merge and create more forceful rivals.

Industry Minister James Moore announced today his government will auction prime AWS-3 spectrum, but in a way that would motivate an investor to buy and combine smaller, struggling firms such as Mobilicity and Wind Mobile, The Globe and Mail's Steven Chase and Christine Dobby report.

The auction will set aside a large 30 MHz block of the AWS-3 spectrum on offer in each re‎gion of the country for bidding only by small players that are currently operating in that region.

The auction date is not set but will take place with results available before an already scheduled sell of of separate 2,500 MHz spectrum in April 2015.

The government is promising a "simpler, shorter" auction process, as well.

Building permits rise
Canada’s construction industry has grand plans going forward, taking out building permits at a far stronger pace than expected.

City governments across the country issued permits valued at $6.9-billion in May, an increase of 13.8 per cent from April, Statistics Canada said today.

Economists had expected a far slower increase, something more in the area of 3 per cent.

The May surge, however, was largely because of construction plans for commercial buildings in Ontario and Manitoba, rather than a push for residential real estate.

Having said that, plans for condo construction in British Columbia also helped drive the increase.

Economists had believed that the May number, coupled with a report expected Wednesday on actual housing starts, would help ease concerns of overbuilding.

But on the residential side, today’s report showed an increase of 9.5 per cent, spurred on by eight provinces. Notably, permits for multi-family dwellings such as condos rose 16.1 per cent.

The commercial side of the ledger, though, showed a far greater rise, of 20.8 per cent.

“The Canadian building permits were much better than expected, suggesting some support for housing starts later in the year,” said senior economist Krishen Rangasamy of National Bank.

“That being said, it’s unclear how much of those residential permits will translate into actual starts,” he added.

“Indeed, permits have been larger than starts over the past year, particularly for multiple units, suggesting that condo developers may be delaying construction, perhaps waiting for current excess supply to be absorbed.”

Traffic up
Canada’s two largest airlines reported increased traffic in June and higher load factors amid growing numbers of Canadians taking to the skies, The Globe and Mail's Greg Keenan reports.

Air Canada’s traffic grew 11 per cent, boosting its load factor to a record 85.7 per cent. The carrier increased its capacity by 10 per cent last month.

WestJet Airlines Ltd. said its traffic grew 5 per cent, pushing the Calgary-based carrier’s load factor to 77.4 per cent, up 0.6 per cent from a year earlier. WestJet increased capacity by 4.3 per cent.

The WestJet results led industry analyst Cameron Doerksen of National Bank to raise his forecast for second-quarter results and his target price for the company’s shares to $30 from $29.

Analyst Chris Murray, who follows the airlines for AltaCorp Capital in Toronto, said the Air Canada results exceeded his expectations.

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