When it comes to railing against the perceived injustices of the global currency market, Stephen Poloz doesn't have quite the theatrical bombast of Donald Trump. But he may have a more compelling case – and he has become increasingly vocal about it.
At a speaking engagement in Edmonton Tuesday, Mr. Poloz, the Bank of Canada governor, was asked about the Canadian dollar, which has become a currency darling since Mr. Trump's U.S. presidential election win in November. Since election day, the Canadian dollar is up 5 per cent against the euro, 11 per cent against the Japanese yen, 14.5 per cent against the Mexican peso – despite little improvement in Canada's economic and interest-rate outlook, the kinds of things that normally underpin a currency's value.
For the second time in two weeks, Mr. Poloz took the opportunity to argue that the currency's rise is both unjustified and unhelpful.
"The U.S. dollar has risen, taking the Canadian dollar with it; so, against other currencies, the Canadian dollar is getting quite a bit stronger. And that, of course, is another headwind for our exports," Mr. Poloz said. "Our exporters are competing with other sellers in other economies trying to sell to the United States, and they're losing competitiveness – even though our exchange rate with the U.S. is not really moving much."
Mr. Poloz stressed that Canada's economy still has significant excess capacity, very much unlike the United States, which is at or very near full employment. Because of that, he stressed, the Bank of Canada's official interest rates aren't about to follow the U.S. Federal Reserve's rates, which were increased in December and look likely to go up two or three more times this year.
This economic and monetary policy divergence should mean different directions for the countries' respective currencies. The loonie is being swept along on a ride for which it hasn't bought a ticket.
This is not the first time Mr. Poloz has been accused of trying to talk down the Canadian currency; it's something he has heard early and often during his three and a half years as governor. He has always bristled against his image, as the former head of Export Development Canada, of a guy pursuing a weak-currency policy to give his old buddies in the export biz a competitive leg up. The governor insists that he isn't in the business of targeting the exchange rate – targeting the inflation rate is more than enough work for the bank, thank you very much, and trying to manage both would be policy suicide.
Yet, he has also embraced the reality that a weak loonie, as a natural consequence of the oil shock that gutted the value of Canada's exports, comes in very handy in lifting the competitiveness of the country's non-energy exports – and thus helps facilitate the economy's return to full health and its rotation away from weakened resources. This is a critical component to the path the Bank of Canada has laid out for the Canadian economic recovery.
But it doesn't work when the Canadian dollar is moving in concert with its U.S. counterpart; the U.S. market is, after all, home to 75 per cent of Canada's exports. The longer it lasts, the bigger an impediment it becomes on that recovery path.
And so, Mr. Poloz made his case two weeks ago, when the Bank of Canada released its quarterly Monetary Policy Report, and he doubled down on it in Edmonton on Tuesday. Mr. Poloz might quibble over the notion that he is "talking down the dollar," but he's certainly using his public platform to try to disabuse the currency market of its misconceptions that are propping up the dollar. The intended result is the same, no matter what you call it.
Whether it will work is an uncertain and complicated question. There's certainly more at play here than a simple misread of Canada's currency fundamentals by ill-informed markets. Mr. Poloz has said himself, repeatedly, that the Canadian dollar is more driven by the price of oil than any other factor influencing its exchange rate, reflecting Canada's image in the currency market as a resource-driven export economy. And crude has been trading at 18-month highs.
Meanwhile, Mr. Trump's combination of policy and posturing threatens to shake up the global currency market in unpredictable ways. On the one hand, his threats to impose steep border taxes on imports and to effectively subsidize U.S. exports would suggest upward pressure on the U.S. dollar. On the other hand, his own railing against the high value of the U.S. dollar relative to key competitors such as China and Germany suggest he may be determined to help the currency lower, which would probably mean a major repositioning of global currencies if he follows through.
And while Canada might have a case that it is getting unfairly caught in the crossfire, we're hardly the only country in the world that sees a weaker currency as the path to an export recovery, amid a persistently sluggish global trade environment. Indeed, the trade war that Mr. Trump looks on the brink of declaring will necessarily have a currency war as a key component, as countries scramble to stay competitive in what could be a fast-shifting trade landscape.
Mr. Poloz will have to speak very loudly indeed to be heard above that noise. Especially now that the United States, and Mr. Trump, have joined in.