Poloz’s Sway Over Loonie Is the Envy of Central BankersAri Altstedter
Bank of Canada Governor Stephen Poloz, only a year into his tenure, is fast becoming the most influential central banker in the foreign-exchange market.
His public pronouncements have had almost three times more impact on his nation’s currency than his colleagues in Japan and Australia, according to Citigroup Inc. Even the European Central Bank’s Mario Draghi, who took the unprecedented step of moving to negative interest rates after months of warning about the euro’s strength, has had less effect.
“If Draghi was to look at that, he’d probably say, ‘Man, I wish I had that clout,’” Richard Cochinos, the head of Americas Group-of-10 currency strategy at Citigroup in New York, said in a June 11 phone interview. “The market is predicated on trying to sell the Canadian dollar. What Poloz is gifted at doing is giving them the opportunity.”
Since taking over at the Bank of Canada last June, Poloz’s statements have shifted from cautioning about the need for interest-rate increases to a neutral view that leaves open the possibility of a cut, increasing pressure on the nation’s dollar. Poloz’s occasional references to the importance of a weaker currency to support exports and persistent warnings about the threat of low inflation have kept up the pressure.
The Bank of Canada’s rate decisions have, on average, caused the local dollar to depreciate about 0.27 percent since the beginning of 2013, according to Citigroup data. The Bank of Japan’s decisions on borrowing costs have tended to knock only 0.11 percent off the yen, while the Reserve Bank of Australia’s meetings have had about the same impact on its currency, only in the opposite direction. Draghi elicited less than a 0.1 percent change in the euro per press conference.
Poloz’s cautious view on the economy is echoed in the marketplace. While growth in both the U.S. and Canada is forecast to reach 2.2 percent in 2014, America’s expansion will accelerate to 3 percent in each of the next two years, or 0.5 percentage point more than its northerly neighbor, according to Bloomberg surveys.
“He doesn’t have a secret sauce -- he’s telling it the way it is,” Jack Spitz, the managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “The market accepts the economics of Canada are not robust and he’s just stating fact.”
The loonie, as the Canadian dollar is called for the image of the aquatic bird on the C$1 coin, has fallen 1.5 percent over the past six months to C$1.0867 per U.S. dollar as of 10:33 a.m. in Toronto, the worst performance among G-10 currencies. One loonie bought 92.02 U.S. cents.
The decline is forecast to continue, with the currency reaching C$1.15 per U.S. dollar by mid-2015, according to the median estimate in a Bloomberg survey of 13 economists and strategists.
In his April 16 rate decision, Poloz said Canada’s recovery “hinges critically” on increased exports that will be helped by a weaker currency. The loonie fell 0.3 percent that day.
“It’s a good understanding of the psychology of the market,” Sebastien Galy, a senior currency strategist at Societe Generale SA in New York, said in a June 11 phone interview. “It’s a good understanding also that there’s a structural problem in Canada, which is that part of the economy is overpriced.”
Poloz, 58, came to his job after a stint leading Canada’s export development corporation, where he got a first-hand look at the damage the currency’s strength had wrought on manufacturers. Canada still sends about 75 percent of its exports to the U.S., though the nation’s producers have been losing market share in the past decade.
Industries such as textiles, clothing and motor-vehicle parts have suffered such decline because of foreign competition that they’re unlikely to see much benefit from a weaker exchange rate, the central bank said in an April 24 report.
Poloz said during the June 4 rate announcement that “the downside risks to the inflation outlook” remain, even after the most recent data showed consumer prices rose at the central bank’s 2 percent target for the first time in two years. The currency fell to a four-week low.
Draghi has also made fighting deflation his primary concern, though he’s been more explicit about linking the issue to the exchange rate. He said in March that the euro is “increasingly relevant in our assessment of price stability,” before warning last month that the currency’s strength is “a serious concern.”
That didn’t have the intended effect, and the euro continued to climb until Draghi backed his words with action by cutting the ECB’s deposit rate to below zero on June 5.
A weaker currency tends to stoke inflation by making imported goods more expensive, even as it benefits exporters by making their products cheaper to buy in other countries.
The BOJ’s own campaign of unprecedented monetary stimulus caused the yen to depreciate last year, though those losses have reversed in 2014 as investors turned to Japan as a haven from emerging-market turmoil.
Australia’s Glenn Stevens accompanied two years of rate cuts with some of the most explicit language on a currency used by any central banker, even saying last year that he’d prefer the Aussie to fall to 85 U.S. cents.
Stevens’s efforts helped push the currency to a 2 1/2-year low of 86.60 cents on Jan. 24. The Aussie has rallied since, prompting the RBA to complain last month that it was high by historical standards.
“Ultimately, it’s difficult to sway the view and the direction of the foreign-exchange market,” Citigroup’s Cochinos said. “The more you verbally intervene and the more you do it, the less impact it has over time.”