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at the bell

Bank of Canada Governor Mark Carney gives his opening address at the Vancouver Island Economic Alliance Conference in Nanaimo, B.C.CHAD HIPOLITO/The Canadian Press

Come Tuesday morning, Bank of Canada Governor Mark Carney will have some serious fessing up to do.

That's when the central bank releases its latest interest-rate statement. Far from being its normal yawn, this announcement might actually be interesting. Market players are on high alert over what Mr. Carney didn't say in a speech in Nanaimo, B.C., last week. For the past half year, the bank has been using a stock phrase that "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate." This has been taken to mean it is more likely to raise rates than to lower them, a so-called tightening bias.

The hawkish sentiment, which has made Canada an outlier in the world of central banking, was nowhere to be found in Mr. Carney's speech in Nanaimo. Since then, the Canadian dollar has looked wobbly and no one can figure out if Mr. Carney is switching gears, yet again.

On this score, Mr. Carney hasn't looked good. The central bank, presumably with Mr. Carney making the final call, has had a recent record of zigging when it should be zagging.

Despite the Bank of Canada's international reputation for prescience, its calls suggest it's struggling, like all central banks, to figure out the correct course in challenging economic conditions.

Back in March, for instance, the bank had a neutral stance. Come April, just as the euro zone crisis was intensifying again and fears were emerging that growth globally was slowing, the Bank of Canada switched to its current tightening bias – a move more appropriate for expansive times.

Also open to debate is whether the bank was too hasty in tightening policy in the wake of the crash, the worst economic calamity since the Great Depression. It started to raise interest rates back in mid-2010, taking the bank rate from 0.5 per cent to 1.25 per cent, where it rests currently. Meanwhile, the U.S. Federal Reserve has been on hold and the European Central Bank has been cutting rates.

If there is another change in stance this week, "such a move would mark the second time in two years that the central bank has had an 'about face,'" noted Mark Chandler, RBC Dominion Securities' fixed income strategist, in a missive to clients.

Still, if Mr. Carney does make a switch to a more neutral stance, that might not be such a bad thing.

One very good reason for moving into neutral concerns the Canadian dollar and the message being sent by the smaller European countries, such as Denmark, that are outside of the euro zone. They're having difficulty suppressing unwanted currency appreciation, due to speculative money inflows out of euros.

Could a similar disruptive form of capital movement eventually cross the Atlantic, with nervous capital fleeing the U.S. dollar for its Canadian counterpart? It's not as far fetched as it might seem.

The U.S. has well known fiscal problems that, by comparison, make Canada an attractive destination for skittish money. Already, some central banks, such as Russia's, have begun diversifying into the loonie, probably by exiting some of their U.S. dollar or euro positions.

In the U.S., there's also one of the most intense fixations with things Canadian that we've ever seen. The Democrats love us because of our left-leaning social programs, the Republicans because of our fiscal probity at the federal level. Interest in some of Canada's corporate tax advantages have figured in the U.S. election debates from the Republican side, another first in a nation that seldom takes any notice of us.

In interviewing American market players, I'm constantly surprised at the extent of their enthusiasm for Canadian investments. It's the mirror image of the dark days in the mid-1990s, when the Wall Street Journal made its famous "northern peso" editorial call on the Canadian dollar. It was actually a brilliant time to apply some contrarian thinking and load up on cheap loonies.

Later this year, the U.S. will have to face its fiscal cliff. Big U.S. deficits stretch as far as the mind can foresee. Many investors in U.S. dollars are worried that the Fed's unconventional monetary policy amounts to money printing. In this kind of environment, one of the last things the Bank of Canada should be considering is offering an even better safe haven.

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