This week, Bank of Canada Governor Stephen Poloz took the opportunity once again to talk down the Canadian dollar, as he has at almost every opportunity since he took the helm of the central bank.
His plan has been working for the most part as the Canadian dollar has been on a downward trajectory since Mr. Poloz took over. It eroded in the first quarter of the year, and rebounded in the second, most recently trading in a range of about US$0.93 to US$0.94.
The central bank has for some time now held what is known as a neutral bias, which means it’s sending no signal to the markets of whether the next move in its benchmark rate could be up or down. Governor Poloz, however, has left the door open to a rate cut, which has had helped hold the currency down. And the weak jobs report from Statistics Canada last week helped feed into that.
“While there’s no disputing the Canadian manufacturing sector has been in secular decline for more than 30 years, the Loonie has been a pivotal factor in driving activity,” senior economist Benjamin Reitzes of BMO Nesbitt Burns said in a research note this week.
“Clearly the run to parity had a devastating impact on the sector,” he added, referring to his research – posted in chart from below – that shows how the movement in the currency has affected factory jobs, with a lagging impact.
“The only good news here is that the chart suggests we may be nearing a bottom on manufacturing employment. Indeed, if the Loonie weakens as we expect, that could mean some improvement in a year or two.”
This past Wednesday, shrugging off a recent surge in inflation as temporary, the Bank of Canada warned the country’s economy does not yet have enough steam to grow without the bank’s help and said it could just as easily cut interest rates as raise them.
The central bank, as expected, kept its key overnight rate at a low 1%, the stimulative level at which it has been for 46 months. But Governor Stephen Poloz made clear he is worried about downside risks to the economy after “serial disappointment” with global growth in recent years.
“Monetary conditions today are highly stimulative and it’s evident that we don’t have a process of natural growth in the economy yet,” he told a news conference.
The central bank said it would keep its policy stance “neutral,” meaning its next move could be either a tightening or easing.
Small-Cap Opportunities in Exports?
While we see the potential for opportunities to present themselves in the Canadian export sector in a lower dollar environment, we are careful not to base our analysis strictly on this one factor. While the current bias appears to be for a lower Loonie, this is far from a fait accompli.
At this stage, we prefer to invest in quality companies, be they Canadian exporters or Canadian energy producers for example that are already profitable and well run and would benefit further from a lower Loonie, but do not require that type of environment to be profitable and ultimately successful.
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