The Canadian dollar, often called loonie, has fallen in most of trading days against the U. S. dollar since the new year. It touched a 13-year low on Friday, well below 70 cents in U. S. dollar.
Many people blame low commodity prices, slowdown of economic growths in the emerging markets, and the rising of U. S. interest rates. But these factors do not represent a whole picture and they represent external forces that have negative impact on the loonie.
Canada emerged from the 2008 financial crisis as the strongest among the advanced industrial countries. Its banking industry was admired as a role model by others. Its government fiscal conservativeness provided ample rooms for economic stimulus. And, for the monetary policy, Canada had Mark Carney, one of the best central bankers in the world, who steered the policy evolution with decisiveness, calm and superior wisdom.
The loonie was strong indeed! Carney said in one of his speeches, that a strong Canadian dollar benefited Canadians overall. Carney was a Harvard graduate, an Oxford Ph. D. in economics, and began his career in Goldman Sachs. He was recognized by the world for his leadership during the world financial crisis and has earned recognition as a top figure in the financial world.
Unfortunately Carney left the Bank of Canada in June 2013, and following that the Canadian dollar began the course of decline. In my note on Oct. 26, 2013, I correctly pointed out that there was a philosophical change within the Bank of Canada. The new governor, Stephen Poloz, has favored a weak Canadian dollar to drive exports of Canada. Poloz, who has education background of currency and working experience in the Export of Canada, seems to believe weak loonie would benefit Canadians.
In the globalization world, the reality is much complicated than what text books are written about. Weak Canadian dollar has not provided much benefit to grow exports in Canada. Canada’s main trade partner, the U. S. has been undergoing a reverse of off-shore and bringing back many manufacturing and technology companies, and even producing more oil and natural gas domestically. With weak loonie, however, the Canadians suffered from high prices in gasolines, increasing prices in food and other necessities that are generally imported. Canada is also accelerating the loss of human resources, especially young people, who choose to work in the U. S. The total loss as a result of weak Canadian dollar, is in the magnitude of trillion dollars for Canada.
There is not much the Bank of Canada can do now. It will be not a smart move if they cut interest rate next week. However, the government can offer some helps. First, to start fiscal stimulus, to borrow money and to build infrastructures. Second, to attract foreign companies to Canada with tax incentives. Third, to call Mark Carney back from England. In the time of crisis, wisdom and leadership will make a big difference.
References:
1. Kevin Economy Note on Oct. 26, 2013, Philosophical changes in conducting monetary policy by the Bank of Canada.
2. Kevin Economy Note on Jan. 22, 2014, Monetary policy and weak Canadian dollar.
3. Kevin Economy Note on Oct. 21, 2015, Canadian dollar could weaken further.