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Is the Bank of Canada in Favour of a Low Dollar Policy?

In our view, the Bank of Canada is increasingly open to a low dollar policy as part of the plan to drive growth towards investment and exports. Below are some excerpts from yesterday’s speech on exports. The differences in emphasis with the last speech focused on exports given by Carney in 2012 are striking (excerpted further below). Here are some excerpts from Senior Deputy Bank of Canada Governor Tiff Macklem’s speech yesterday on Canadian Exports: “A second factor influencing our exports is competitiveness. Between 2000 and 2012, the labour cost of producing a unit of output in Canada compared with the United States, adjusted for the exchange rate, increased by 75 per cent. The majority of this loss of competitiveness reflects the appreciation of the Canadian dollar (shown in blue), but weak productivity growth in Canada relative to the United States also played a significant role (shown in green).” …… “What if we hadn’t lost competitiveness? What would our exports be had our competitiveness stayed at its 2002 level? If Canada’s exports had grown in tandem with those of the U.S. and global economies—in other words, taking the weakness of the global economy as a given and excluding oil—our goods exports would have been $71 billion higher.” …… “With inflation subdued, monetary policy remains highly stimulative to provide time for the recovery in exports and investment to take hold.” Compare all of that to former Governor Carney speaking back in April 2012 on the same topic: “A commonly held view is that our poor export performance is the result of competitiveness challenges, particularly the persistent strength of the Canadian dollar. There is some truth in that…” “However, it is telling that, despite these developments, competitiveness effects were less important than the drag coming from market structure…” “Our exports are concentrated in slow-growing advanced economies, particularly the United States, rather than fast-growing emerging markets.” …… “In short, our underperformance prior to the crisis was more a reflection of who we traded with than how effectively we did it. This is even more the case since the onset of the Great Recession.” …… “Canada is likely to remain a relatively attractive investment destination, owing to the strength of our financial system, competitive tax system, sound public finances and credible monetary policy. Given this and elevated commodity prices that have raised our terms of trade, a sustainable export strategy cannot rely on expectations of a more favourable exchange rate.”

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