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.
Bank of Nova Scotia chief currency strategist Camilla Sutton rejects the notion that Mr. Poloz is directly targeting the currency. But a weaker dollar is a "byproduct" of Canadian monetary policy that is overtly "loose and expansionary" at a time when the U.S. Federal Reserve is withdrawing monetary stimulus, she said.
"We are going to continue to see weakness in the Canadian dollar because of that," Ms. Sutton said.
What's driving the dollar lower
The main driver may well be the strengthening U.S. recovery and the prospect of tighter monetary conditions there, as Mr. Poloz says.
It's also true that the petro-dollar story that helped propel the Canadian dollar to par and beyond in recent years is a lot less compelling now.
Prices for key commodities, including crude oil, have weakened over the past year. There is also growing unease about the longer-term fortunes of the Canadian oil patch. Pipeline bottlenecks and a string of rail spills have raised troubling questions about how new oil sands crude will get to refineries. And with the U.S. headed toward to energy self-sufficiency, some analysts wonder where the customers will be for all that oil.
All this creates uncertainty, which financial markets don't like, Scotiabank's Ms. Sutton said. "We are going to continue to see weakness in the Canadian dollar because of all that," she said.
There are also powerful macroeconomic factors working against the currency. The dollar's rise in recent years coincided with an ominous buildup in Canada of large trade and government deficits. That suggests the dollar was getting dangerously overvalued and poised for a fall, argued Dan Ciuriak, a research fellow at the C.D. Howe Institute and former deputy chief economist at the Department of Foreign Affairs and International Trade.
"Typically, a country which is not a major reserve currency country cannot run a persistent current account deficit and government deficit, and not have the market re-examine its credentials," he said.
But Jayson Myers, chief executive officer of Canadian Manufacturers & Exporters, the country's largest industry group, said the dollar weakness doesn't detract from all the good things Canada has going for it – particularly, its close trade ties to the strengthening U.S. economy.
"The dollar is not a popularity contest," he said. "We shouldn't be carried away with our image in the mirror."
And the winner is ... manufacturing
A weaker dollar is welcome news for large swaths of the economy that have struggled to recover from the recession – most notably manufacturers.
"At least we stand a fighting chance of making some profits," said Rob McBain, chief executive officer of Ancast Industries Ltd., a Winnipeg maker of custom cast-iron castings for forklifts and other vehicles.
Half of the company's sales are in U.S. dollars. A lower Canadian dollar means higher profits and more money to invest and increase staff. It's a return to normalcy after a challenging period, when the dollar hit $1.10 and his company was barely breaking even. Mr. McBain watched with angst as many fellow Canadian manufacturers went out of business.
"Those of us who spent enough time building good balance sheets and have survived are now in a position to enjoy the fruits of a recovering U.S. economy, with a normal currency exchange rate," he said.
Electrical Contacts Ltd. of Hanover, Ont., a niche maker of electrical contacts for circuit breakers, is experiencing a similar reversal of fortunes. Ninety-five per cent of the company's sales are priced in U.S. dollars. President Peter Allen acknowledged that the company "took a hit" when the dollar soared above par.
A currency swing of this magnitude significantly improves the cash position of the company, which has 120 employees.
"It's good for our margins, no question about it," Mr. Allen said. "We have more money to invest. It's all about making the business stronger and more sustainable, and the lower dollar does that."
Re-shoring, a much-discussed trend south of the border that has seen auto makers and other global manufacturers bring production back to the U.S., has not yet spilled over into Canada. The strong dollar was a key reason why. With a weaker currency, Canada could benefit.
"A dollar at 90 cents is going to be a lot more attractive for companies to come to Canada, keep investments here, or just to remain in business," Mr. Myers said.
Plitron Manufacturing Inc. of Toronto, a maker of transformers, plans to give more employees raises and bonuses because the lower dollar is boosting profits on its exports.
But the dollar story is not all good. Electrical Contacts buys many of its inputs and raw materials in the U.S., and those are now more expensive. Its prices are also becoming less attractive in countries that, like Canada, have currencies that are weakening against the U.S. dollar.
Some industries are already reaping the fruits of the weaker dollar. In the film sector, Peter Leitch, president of North Shore and Mammoth Studios in Vancouver, says the second half of last year was far busier than the first half – a direct result of the lower loonie, which made it cheaper for Los Angeles film companies to choose Canada as a location.
"We're in a very positive frame of mind in terms of business going forward this year," he said. "It makes a big difference when you're attracting a feature film with a budget of $200-million to bring it up here when the dollar's lower than it was."
That's bolstered confidence – a missing ingredient in much of Corporate Canada, which has for the several years been reluctant to make big investments or hire in great numbers. "It gives us confidence … to continue to invest in the business," Mr. Leitch added.
Retailers lose, and win
Consumers could be among the losers. Prices here could rise, while trips south of the border will get more expensive.
A weaker dollar will eventually make imports more expensive, which could prompt some retailers to raise prices to protect their margins. But it's a process that could take some time.
For now, that impact looks muted. Recent history has shown currency fluctuations don't have a huge impact on consumer prices, said Douglas Porter, chief economist at BMO Nesbitt Burns, adding that heated competition in the retail sector will keep pressure on companies to hold prices down.
"On the margin, the drop in the currency will have a bit of an impact," he said. "That's not to say that inflation is now going to come flaring back. But it seems that the downward pressure on prices may have crested."
Canada's inflation rate averaged just 1 per cent or less last year, the slowest pace since 2009 when the country was in the thick of the recession. This year, it's expected to stay tame, with economists forecasting that on average, consumer prices will increase at a 1.5-per-cent pace.
The first place consumers may feel the pinch could be groceries, which tend to be the quickest to respond to currency fluctuations. But heated competition may put a lid on increases for consumers. So "that classic bellwether might actually not respond that much," Mr. Porter said.
For retailers, the dollar's decline has a mixed impact, depending on the nature and location of their businesses, said David Wilkes, senior vice-president at the Retail Council of Canada.
He lists three ways retailers are affected: It makes imports priced in U.S. dollars more expensive. On the positive side, a weaker dollar helps exporters, in turn bolstering many local economies, which is good for retail spending. The other advantage, particularly for retailers close to the U.S. border, is the disincentive to cross-border shop. Retailers could win back business if the lower dollar dissuades shoppers from buying goods in the U.S.
Sears Canada sees a "two-pronged" impact from the weaker dollar. It's a benefit if shoppers think twice about crossing the border, although it does mean higher import prices, said spokesman Vincent Power.
"We hope Canadian consumers see the advantage and overall benefits of shopping in Canada, which supports Canadian jobs and the Canadian economy as well," he said.
Whether higher imports will spark price hikes for consumers, he said it hinges on what competitors do and how consumer confidence unfolds. "It depends on what's happening in the marketplace. No. 1 is we're going to be competitive," he said.
Cross-border shopping has ballooned in recent years as Canadians flock to the U.S. in search of cheaper deals. In British Columbia, for example, same-day trips to the U.S. have more than doubled in the past several years, with the Business Council of B.C. estimating shoppers spent up to $1.6-billion (Canadian) in shopping trips in 2012 alone.
The hope is that a weaker dollar will spur shoppers to spend at home. In Niagara Falls, at the border's edge, Marjorie Ruddy, marketing manager at Canada One Factory Outlets, notes that the whole region has been hurt by a loonie at or above par in recent years. The number of American visitors dropped off, while at the same time Canadians flocked south for shopping. Now that the loonie is lower, "will people think twice about crossing the border? Probably," Ms. Ruddy said.
Academic research backs up that observation. "There's very, very clear evidence that cross-border shopping is very sensitive to the value of the Canadian dollar," with "significant" drops in same-day trips whenever the loonie weakens, said UBC's Prof. Devereux.
Good for tourism, bad for sun seekers
There are winners and losers in the tourism industry. Among those cheering the loonie's decline is Eugene Zakreski, executive director of Stratford Tourism Alliance.
His town lies about two hours west of Toronto, and is best known for the Stratford Festival, one of North America's top destinations for classical theatre. Five years ago, about a third of summer visitors were American before the recession caused their numbers to tumble.
They're now returning. U.S. visitors to Stratford rose 15 per cent last year, and Mr. Zakreski says the weaker dollar and an improving U.S. economy will likely lure more of them back this year.
"With a dollar at 10 cents below parity, that may be just the thing that will continue to have them coming," he said, adding that he's expecting another 15- to 20-per-cent increase this year. Optimism is such that marketing budgets are being boosted to advertise in the Chicago area.
American travellers are far and away the most important source of tourism revenue for Canada – and their numbers have dropped precipitously in recent years amid what had been a stronger loonie, border headaches and new passport rules. It's a different case for firms with a focus outside of Canada. For airlines, a weaker dollar means more expensive fuel costs, which are priced in U.S. dollars (although that may be offset by softer oil prices).
The dollar is squeezing margins among those that offer package trips to sunny locations. Sunquest has cautioned customers it will boost prices next week due to the sustained drop in the dollar. Both its hotel and fuel costs are denominated in U.S. dollars.
"We can cover off short-term currency spikes," said Bryan Klompas, executive vice-president at Sunquest. "But if there's a sustained move where [the U.S. dollar] is plateauing at a high level, then ... the prices have to go up to reflect the fact that we'll be having to buy U.S. dollars and pay hotels in U.S. dollars and it will cost us much more to buy that currency."
The company didn't say how much of a price hike is in store, although hotel costs could rise by about 2 or 3 per cent, he said.
Snow birds have been watching the loonie's decline with dismay. In Naples, Fla., where Stephen Connolly, 66, and his wife are staying for the winter, he figures the slide from parity will cost them an extra $1,500 to $2,000 this year as they pay more in condo fees, restaurants and gasoline.
"Every time you go to the bank machine, you're losing money," he said in an interview. With more Canadian retirees flocking to Arizona, California and Florida in the winters, "it's really affecting the boomer age. But what can we do?"