Bank of Canada Governor Mark Carney said Wednesday that trading the Canadian dollar as a petro-currency is a "recipe for losing money" over the medium term.
"It is far too simplistic to talk about the Canadian dollar as a commodity currency, let alone a currency that moves consistent with one commodity," Mr. Carney said at a press conference.
To that, BMO's Douglas Porter offered this rebuttal (see first chart below):
Mr. Porter ran the loonie's exchange rate against the FIBER Industrial Materials Price Index going back 10 years. His conclusion: the Canadian dollar has traded in concert with commodity prices 93 per cent of the time over the past decade – "leaving seven per cent for the non-simplistic to explain," Mr. Porter said.
It's going to be extremely difficult for Mr. Carney to persuade traders to stop grouping the loonie with currencies such as the Australian dollar. That perception, right or wrong, will keep upward pressure on Canada's currency.
The Bank of Canada's latest Monetary Policy Report has charts, too. While not superimposed like Mr. Porter's, the MPR on page 15 shows the loonie has climbed since the start of the year, even as commodity prices have declined. That supports Mr. Carney's argument. The loonie apparently is being supported by other factors at the moment, probably increased demand for AAA-rated government debt.
Part of Mr. Carney's message Wednesday was that the rules governing Canada's economy have changed. Because Canadian crude prices are well below the world price, rising gasoline prices represent a drag on the Canadian economy because there is no offset from oil profits. Therefore, it would be wrong to trade the Canadian dollar with the world oil price because higher pump costs are hurting the economy.
But see the second chart below, courtesy Marc Pinsonneault at National Bank Financial:
The share of commodities to overall Canadian exports has surged over the past decade to 64 per cent from 42 per cent at then end of the 1990's. There's a considerable price effect there, but Mr. Pinsonneault notes there also is a big increase when prices are factored out. In volume terms, commodities represent almost 49 per cent of Canadian exports compared with 45 per cent in 2007.
As go commodities, so goes Canada's economy. And it's reasonable to expect the dollar won't be far behind. "On exchange markets, the loonie is considered a commodity currency…That market perception is founded," Mr. Pinsonneault said in a note to clients.