Dollar Up, Recovery Down: Mr. Carney Needs Room to Make Things Right

In the past, governments have assumed that passive acceptance is the best response to currency fluctuations. Now both the Minister of Finance and the Governor of the Bank of Canada have suggested it may be time for a more interventionist stance on the Canadian dollar. We couldn’t agree more. Yesterday’s approach will not protect us in tomorrow’s economy.

For the past decade the Bank of Canada focused on one objective:  controlling inflation; and it relied on one instrument: setting interest rates. It was content to leave it to foreign exchange markets to set the price of the Canadian dollar. This resulted in wild volatility that undermined faith in Canada’s continued capacity to succeed as an exporting nation.

Current circumstances demand bolder action.  As a small, free-trading nation our quality of life is highly dependent on our success as a global exporter. And that success is hugely determined by the value of our currency.

We still believe that over time, the exchange rate should be allowed to reflect the economic fundamentals.  But it is clearly at our economic peril that we allow the vagaries of speculative markets to create sharp, short-term distortions in the value of our currency.

In the pulp industry, for example, a one point appreciation in the Canada-US exchange rate decreases the industry’s earnings by 15%. The impact on the industry of the loonie’s rapid ascent and volatility over the first half of this year, has undermined what could have been a robust recovery. Instead, it has wiped out 80% of the sector’s earnings and left the jobs of thousands of workers in hundreds of communities across the country hanging in the balance.

The same grim scenario is playing out across the full spectrum of the manufacturing sector that is seeing a return of demand and stronger prices being offset by a speedy rise of the dollar.

The world has changed over the last year. All nations are emerging from the recession leaner and hungrier. Global competition for position in returning markets  is  very aggressive .  National governments and their agencies are intervening as never before in their economies in an attempt to get their share.

The single biggest  lever our government has for export success in the short term is exchange rate policy .This is particularly true when the dollar’s rise is driven by speculation rather than economic fundamentals, as has been been the case for the past six months.

We need a Bank that is prudent but also one that is agile and self-assured. In a changed world, sticking to yesterday’s recipe for how and when the Bank of Canada should intervene in the economy would simply be wrong.

While the Bank and its leaders are best placed to determine what measures to use, their goal should be to dampen the dollar’s swings and to employ all the tools at their disposal to position the Canadian economy for success.

Avrim Lazar is President and CEO of the Forest Products Association of Canada
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