Mark
Carney, the governor of the Bank of Canada, said Tuesday the central
bank remains “concerned” over the dollar’s elevated levels as a result
of tensions in currency markets and the impact it could have on net
trade.
His comments came as a new forecast indicated Canadian exports would soften significantly in 2011 on weaker global demand.
As
he has in the past, Mr. Carney said the central bank had “options”
available, such as measures allowed under its foreign-exchange
intervention policy.
“There is a heightened tension in
currencies … [and] the Bank of Canada is keeping its options in order to
manage the situation, if need be,” Mr. Carney said Tuesday in response
to a query from Bloc Québécois MP Daniel Paillé.
The
governor’s remarks before the House of Commons finance committee come
after he attended a Group of 20 meeting of finance and central bank
governors in South Korea, where members pledged to refrain from
devaluing their currencies with the aim of boosting their exports.
The
central bank is counting on net trade to make a “modest” contribution
to economic growth. But a stronger dollar could curb firms’ efforts to
sell goods abroad.
“When we look at the tensions in
foreign-exchange markets, we see the link through to Canada as a risk to
the outlook,” Mr. Carney told MPs from all parties.
The
central bank has dramatically reduced its growth outlook for Canada,
forecasting 3% growth this year and 2.3% in 2011, versus previous
expectations for advances of 3.5% and 2.9%, respectively.
Despite
the G20 promise, which Mr. Carney lauded as the first time major
economies agreed to refrain from devaluing currencies, traders have
continued to sell the U.S. dollar on anticipation of further liquidity
injections via the Federal Reserve, keeping the Canadian dollar at high
levels.
Mr. Carney, however, reiterated several times that
the central bank sets its interest rates to achieve and maintain 2%
inflation — not to ensure some specific value on foreign-exchange
markets.
“There is a heightened tension in currencies …
[and] the Bank of Canada is keeping its options in order to manage the
situation, if need be,” Mr. Carney said Tuesday in response to a query
by Mr. Paillé.
Central bank policy is to allow the loonie
to float freely, although it would intervene in foreign-exchange markets
— after consultations with the federal government — to “counter
disruptive short-term movements” in the currency. The last time that
happened was in September 1998.
Some analysts say the Bank of Canada may have to consider intervention if countries opt to ignore G20 commitments.
“If
Canada is going to behave like a boy scout and eschew intervention,
while others promote devaluation through quantitative easing [the U.S.],
central bank intervention [China and Japan] or restraints on capital
flows [Brazil and Thailand], it will be stuck with a strong loonie that
will impede an export-led expansion,” said Avery Shenfeld, chief
economist with CIBC World Markets.
While the central bank
is looking for a “modest” contribution from trade, a new forecast from
Export Development Canada, also unveiled Tuesday, envisages a sharp
pullback in sales abroad in 2011.
Export growth in Canada
will edge downward from 11% this year to 6% in 2011, with sales roughly
11% below peaks hit before the financial crisis ensued, the EDC said in
its semi-annual forecast.
The forecast suggested Canadian
export activity would remain well below its pre-recession peak as the
global economy is over a year away from posting the kind of “aggressive”
growth required to give this recovery some oomph.
Complicating
matters are heightened tensions in foreign-exchange markets. EDC chief
economist Peter Hall warns that countries may engage in more
protectionist measures if their currency interventions don’t appear to
be doing the trick in boosting sales abroad.
EDC sees the world economy expanding by a slower 3.9% in 2011 after a 4.2% gain in output this year.
