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Can Poloz Take Steam Out Of Loonie?

ByThe National Bank of Canada
Published 05/09/2013, 10:08 AM
Updated 05/14/2017, 06:45 AM
  • The Bank of Canada is one of the few major central banks that has remained relatively passive regarding its currency. That stance may have inflated the degree of the loonie’s overvaluation and hurt our exporters, particularly manufacturers, who have seen their US market share shrink dramatically. While domestic demand picked up the slack in recent years, it would be unwise to expect it to continue compensating for underperforming exports. Canada will need exports to support growth over the coming years, and for that to happen exporters may need assistance to help in their transition to increase productivity, e.g. find new markets as to diversify away from the US, but also having a more competitive Canadian dollar.
  • We wouldn’t expect the BoC to start directly intervening in foreign exchange markets for the first time since 1998 or even to cut interest rates (given its concern about debt accumulation), but we would welcome some indirect/stealth intervention via some dovish talk to help take some steam out of the Canadian dollar. While we’ve trimmed our mid-year USDCAD target to 1.02 in light of recent loonie strength, we’ve kept our end-of-Q3 target at 1.05, expecting at least some stealth intervention as Governor Poloz takes office.
  • The eurozone recession may extend for a while longer. The return of sovereign problems could complicate matters further. Slovenia comes to mind as a potential flash point. So, while we’ve raised our targets a bit for the common currency to reflect recent strength, we don’t expect the euro to trade much higher than current levels until late next year. In light of the Reserve Bank of Australia’s recent dovish turn, we’ve also trimmed our targets for the Aussie.
    • Currency Outlook

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