We’re heading back into an economic contraction: David Rosenberg
Veteran Bay Street economist David Rosenberg said the Bank of Canada isn’t out of options when it comes to bringing the sky-high loonie back to Earth.
In an interview Wednesday, Rosenberg, the chief economist and strategist at Rosenberg Research and Associates, said that while there’s little room to clip the loonie’s wings through rate cuts, the central bank could use more unconventional monetary policy measures to assert some control over the dollar.
“I don’t think there’s capacity to cut interest rates from where they are right now, and especially without creating destabilizing conditions in the money market, broadly speaking,” he said. “But they could actually expand their balance sheet, and that would take some pressure off the Canadian dollar by easing policy through quantitative easing.”
Quantitative easing typically lowers a currency’s relative valuation against its peers by increasing the total money supply in the system. The Bank of Canada is currently buying $4 billion worth of government bonds per month through its quantitative easing program, down from $5 billion a month earlier in the pandemic.
That strength in the Canadian dollar has not escaped the watchful eye of Bank of Canada Governor Tiff Macklem, who warned Wednesday that further appreciation could present downside risks to his economic projections as an expensive dollar limits Canada’s export competitiveness.
The Bank of Canada expects the loonie will remain near the 78 cent U.S. level over its forecast horizon, up from the 76 cent projection made in October.
While competitiveness concerns persist, Rosenberg said the knock-on effects of a weak U.S. dollar and improving global growth expectations on commodity prices could soften the blow to Canada’s export economy.
“I’m a little curious about Tiff’s comments, because when you read the [Bank of Canada Monetary Policy Report] you see that the bank is actually quite bullish on global growth,” he said.
“Well, if you’re bullish on the world economy, you’re ipso facto saying ‘I’m bullish on commodities,’ because commodities have that relationship with GDP growth. If commodity prices go up, the Canadian dollar is probably going to appreciate, and there’s nothing really wrong with that.”
Rosenberg said the strength of the Canadian dollar ultimately cannot be viewed in a vacuum, and that the underlying reasons behind how the loonie trades trumps any concerns over absolute levels.
“It depends on what drives the Canadian dollar up. There could be reasons – and it could still be commodity prices – that doesn’t cause any real negative competitive impacts on the economy of the Canadian economy going up, because the resource sector is doing better due to global growth,” he said.
“If the bank gets concerned about it, well, there’s not much they can do on rates. Even a token small, few basis-point decline [in interest rates] is not going to do anything to the Canadian dollar.”