Stephen Poloz’s appointment as head of the Bank of Canada may signal a weaker currency and lower borrowing costs as the world’s 11th-largest economy looks to exports to revive growth.
Poloz, the former chief executive officer of Export Development Canada, a trade financing agency, was named yesterday by Finance Minister Jim Flaherty, who bypassed deputy governor Tiff Macklem for the top job to replace Mark Carney.
“He’s historically a trade guy so he may favor a weaker Canadian dollar to favor exporters,” Jonathan Lemco, senior sovereign-debt analyst at Valley Forge, Pennsylvania-based Vanguard Group Inc., the largest provider of U.S. bond funds, said in a telephone interview.
The Canadian dollar’s relative strength is being blamed by policy makers for helping to drag the economy to its slowest pace of growth since the 2009 recession. It has been boosted by investors searching for yield as other central banks embark on stimulus measures that debase their currencies, policy makers said in their April 17 report, Carney’s last before he leaves June 1 to lead the Bank of England.
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, gained 0.2 percent to C$1.0084 per U.S. dollar at 12:29 p.m. in Toronto. It reached C$1.0052 on May 1, the strongest level since Feb. 15.
Canada’s central bank is alone among Group of Seven nations with a tightening bias, meaning the next move on rates will likely be higher. The Bank of Canada has kept its benchmark overnight rate at 1 percent for almost three years.
Poloz “does not own this tightening bias and the markets are wondering if, when, the bank will remove the tightening bias,” said Ed Devlin, who helps manage $10.5 billion as head of Newport Beach, California-based Pacific Investment Management Co.’s Canadian portfolio management team. “That’s another reason the Canadian dollar might depreciate a little bit and people might think rates might go just a little bit lower.” Devlin said he doesn’t think Poloz will remove the bias.
Poloz joined EDC in 1999 as chief economist after three years with Bank Credit Analyst Research in Montreal and 14 years at the Bank of Canada in roles that included head of the research department. He was appointed president and chief executive officer of EDC in January 2011, a position in which he served until his appointment as Governor of the Bank of Canada.
During the first eight years of his tenure at EDC, the Canadian dollar soared 32 percent against the U.S. dollar, second only to the New Zealand dollar during the period, Bloomberg data show.
“He was the chief economist at the EDC at a key period for the Canadian dollar and would have seen first-hand the impact on exporters,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS), said by telephone from Toronto. “He would have understood the plight of exporters quite well.”
Elsewhere in credit markets, Toronto-Dominion Bank sold $3 billion of two-year floating-rate notes yielding 18 basis points more than the three-month London interbank offered rate.
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government held steady yesterday from a day earlier at 124 basis points, or 1.24 percentage points, according to Bank of America Merrill Lynch’s Canada Corporate Index. Yields were little changed at 2.68 percent.
Spreads on provincial bonds narrowed to 77 basis points yesterday, from 78 basis points on May 1, while yields fell to 2.42 percent, from 2.43 percent, according to the Bank of America Merrill Lynch Canadian Provincial & Municipal Index.
Corporate bonds have returned 2.7 percent this year, while provincial bonds have gained 1.9 percent and federal-government securities have added 1.4 percent, Bank of America Merrill Lynch index data show.
The dollar’s strength is undermining the economy just as tumbling commodities prices detract from growth. Canada’s slice of global non-commodity exports, adjusted for differences in growth among trading partners, has declined about 35 percent since 2000, according to Nomura Holdings Inc.
The currency is considered to be 17.4 percent overvalued against the U.S. dollar based on the Organization for Economic Cooperation and Development’s purchasing power, according to the Bloomberg World Currency Ranker.
While acknowledging the impact of slower global growth and a strong currency on the Canadian economy, the Bank of Canada has refrained from cutting rates amid concern that such a move would only spur a housing market in jeopardy of overheating, a juggling act Poloz will now have to handle.
“The consensus view on the street is that he’s probably a pretty dovish candidate that will probably lead to easier monetary policy than we otherwise would have expected,” Jamie Price, director of fixed income at Macquarie Private Wealth in Toronto, said in an interview.
At the same time, investors aren’t betting on a change in interest rates. Trading in overnight index swaps shows virtually no chance of tighter policy this year. The yield on the government of Canada two-year bond was unchanged at 0.91 percent yesterday after the Poloz appointment.
“It’s not a real shock,” said Randy LeClair, Canadian fixed-income strategist at Manulife Asset Management in Toronto, which oversees C$17 billion of bonds. “I think the new leadership is going to be a continuation of things we’ve seen.”
LeClair said he expects the Bank of Canada to maintain its benchmark overnight interest rate at 1 percent, where it has been since September 2010, through 2014.
Benjamin Tal, deputy chief economist at the investment-banking unit of Canadian Imperial Bank of Commerce, said in a note to clients the Bank of Canada will make no move to either cut or raise interest rates until the first half of 2015.
“The patient has been given the right medicine thus far, so in the near term Mr. Poloz will just have to watch and make sure it keeps recovering,” Tal said.