Tough talking Carney retrenched dollars rise. Or did he?

You would be really mad if you took my analysis and went long on the Canadian dollar especially if you found out I had taken a short position.  None of what you hear, half of what you see.  But seriously can we credit Carney with the non-trivial ( near 5 cent) decline in the Canadian dollar.  Maybe, but only if you can give him credit for talking down the TSX as well.

charting dollar TSXSource: Globe Investor

We do not do spin…We don’t lose our focus: Carney the rain maker

Listening to Mark Carney talk tough is like watching Stephane Dion pound his fists on the table.  Well ok a little more credible than that.  Being a former GS man you know he knows people who know people.  Some of which I should think are quite unpleasant characters.  Problem is there is not really a robust connection between the value of the Canadian dollar and inflation or deflation.  Currency traders probably know this…at least more than they have some version of the standard (and empirically dubious) model in their head.  So when Carney says “we take our inflation target seriously.”   Currency traders likely shrug and say: “we are banking on it.”

Mr. Carney said he has a range of tools and he can use to dampen the blow of the currency’s rise, and signaled that any investor who thinks he’s shy to use them is making a mistake.

“Markets should take seriously our determination to set policy to achieve the inflation target,” Mr. Carney said. “Markets sometimes lose their focus. We don’t lose our focus.”

Carney’s problem (well actually the manufacturing sector’s problem) is that the BOC does not care about the level of activity in exports. It only cares about their target.  Full stop.  So unless deflation increases in some way that can be definitively linked to the appreciation of the CAD–which is doubtful–the BOC is not going to do anything.

Forget the Bank of Canada: We need an INVITE program to stem appreciation of the CDN Dollar.

If what we are worried about is an overvalued CDN dollar which is caused by speculative flows then why the focus on the Bank of Canada?  Exchange rates are not really in the BOC’s mandate.  Sure in the case where an appreciating CDN dollar is causing further deflationary pressures it could be argued that exchange rates are within the purview of the Bank’s mandate.

But the BOC is a conservative (in both the ideological and cultural sense) institution.  Canada does not face the same structural dynamics (problems) as the UK and the US.  And thus I doubt arguments for non-conventional monetary policy responses are going to get very far with the Bank.  Moreover there are downside risks to pursuing unconventional monetary policy.  We might get a lower exchange rate at the expense of perverse side-effects.  So forget the BOC; leave them out altogether.

Thankfully, however, when it comes to exchange rates there are policies available to the government. On such policy could be called an  Investment Inflow Tax Equilibration  program (INVITE).  It would work like this.  A simple 2% tax on all inward portfolio investment (as Brazil just announced) would help stop appreciation in its trax.  Second if we really think much of the dollar’s appreciation is being driven by gas and oil then an additional 2% tax on all oil and gas investment inflows regardless of the type (portfolio or direct) would help further dampen the speculative plays in that sector.  The terminator seed on the INVITE program would be when Canada’s manufacturing sector returned to some degree of health.