Friday, October 23, 2009

I Want a Mark Carney T-Shirt

Mark Carney clearly gets it, telling traders to focus on inflation rather than speculatively driving our dollar higher:

Bank of Canada Governor Mark Carney said currency traders should focus more on how the bank will meet its inflation target when thinking about whether policy makers are considering action to stem its gains.

“Markets should take seriously our determination to set policy to achieve the inflation target,” Carney said at a news conference today, when asked if traders are taking seriously the chances of intervention. “Markets sometimes lose their focus, we don’t lose our focus.”

The primary responsibility of the central bank is to control inflation, that means raising interest rates when price increases threaten to destabilize the economy. It also means there's absolutely no need to raise interest when our dollar has strengthened dramatically - our dollar's strength will keep downward pressure on prices for the foreseeable future.

The strong Canadian dollar makes imports cheaper, as well as making Canadian companies' costs relatively higher than their American competitors. Anyone who participates in international markets, either by exporting, competing with imports, or selling services internationally is going to be hurt by a rapid rise in the Canadian dollar. That's why the Bank of Canada noted Tuesday that the dollar's strength will “more than fully offset” recent signs of growth.

I've noticed a lot of bravado coming from currency traders saying the drop in the dollar as a result of Carney's comments is a buying opportunity. I think it's time for those boys to take contorl of their testosterone. Bloomberg notes:

Carney also said today the bank still “retains considerable flexibility in the conduct of monetary policy at low interest rates,” and that “intervention is always an option.” He spoke during a news conference in Ottawa today after releasing a quarterly economic forecast.

“That is a pretty blunt smack down of some recent commentary,” said David Watt, senior currency strategist in Toronto at RBC Capital, a unit of Canada’s biggest bank. “It shows that the Bank of Canada isn’t musing about exit strategies; I’m not even sure it’s done with stimulus.”

RBC is right. All the tools remain in the Bank of Canada's court. The Bank recognizes that a persistently increasing dollar will seriously hurt our economy so the Bank is prepared to put the brakes on the dollar's ascent. I commend the Bank for its courage and sense of purpose and I'd warn speculators betting on a stronger Canadian dollar that taking on our central bank is likely to be a losing propostion.


Blame Crash said...

It's not that they are betting on a stronger $C dollar, it's much more a case of knowing that the $US dollar is circling the bowl and soon to be going down the drain.

The BOC and the rest of the Smart Set can pontificate all they want, but it’s not going to make an iota of difference when the economic Katrina smash’s up onto our shores.

Patrick O'Neil said...


I agree that someone needs to call the Americans out. Leaders foreswore competitive devaluation earlier this year, but the Americans seem content to let their dollar fall.

That said the Bank of Canada has powerful tools. If they want a lower dollar they can get a lower dollar simply by increasing the money supply more quickly.

Anonymous said...


You are correct ... and that is realistically the only real tool that they have to work with. However, in doing so they would contraveen their own policy of a 2% inflation target.