Canada's Finance Minister Jim Flaherty recently made a very important comment to Bloomberg news during an interview this past Friday, May 10th. The question was in regards to whether exporters had raised concerns about the strength of Canada's currency.
"Not really," Flaherty said, when asked in an interview with Bloomberg News about whether businesses have expressed currency worries. "I find that Canadian exporters, business people, have anticipated the dollar around par and have based their business plans around that."
The CAD (FXC) strengthened slightly on the comments.
These comments have long-term implications for Canadian monetary policy and CAD strength, as the Ministry of Finance just announced the next Bank of Canada (BOC) Governor Stephen Poloz, who will replace Mark Carney June 1st. Of the many reasons toted for choosing Mr. Poloz over other candidates, Poloz's time in the "real economy" was highlighted by Minister Flaherty, who mentioned this experience twice at the press conference announcing Poloz's appointment.
In addition, Poloz touted this experience himself.
In 2012, I think I visited 70 or 75 CEOs across Canada in my capacity at EDC. It gives us a true anecdotal feel for what is going on in the economy, which I consider to be of exceptional value.
For Flaherty to highlight exporters' comfort with the current exchange rate on the heels of Poloz's appointment indicates that the BOC is comfortable with an exchange rate around parity with the USD. This removes one catalyst that would depreciate the CAD from the table, as politicians respond to votes, and if a high exchange rate isn't costing them any, there shouldn't be any action.
Granted, the BOC is supposed to be independent politically, but as the recent episode in Japan demonstrates, this is more theory than fact. The fact is that it is in the BOC's best interest to be popular with voters, and if they aren't, there are consequences. Interestingly, the independence of central banks going forward will be one of the consequences of the Bank of Japan's experiment, as if it ends in disaster, the wisdom of an independent central bank will be confirmed. If not, look for central banks to be increasingly be influenced by politics.
This lack of concern with the exchange rate is significant, as historically speaking the CAD is trading at a premium. Prior to the commodity boom launching post 2001, the CAD was trading at about half of what it is trading at now and on a weakening trend.
Below is a 20 year chart with each bar representing a month. Besides the USD panic rally of 2008, the CAD trading at parity with the USD is a recent phenomenon (this is a USDCAD chart, so the higher the bar, the lower the value of the CAD).
This strengthening CAD has had an impact, as trade as a percentage of GDP fell from 85% to 65% of GDP in Canada during this CAD rally.
Although Flaherty's comments lower the potential for BOC action depreciating the CAD to stimulate exports in the near term, the long term CAD picture is important to keep in mind with regards to the commodity boom. As Stanley Druckenmiller noted in the recent Ira Sohn Conference, he and other prominent money managers see the commodity boom ending. I tend to agree with them, as a long bet on commodities is a short bet on human ingenuity, which never pays off over the long term.
If Druckenmiller is correct, even with Flaherty's comments supporting a stronger CAD, the tail risk on the CAD is to be long the currency.
Additional disclosure: I am actively trading the FOREX market and may be either long or short the currencies discussed at the time of this article's publication.